Insurers v. Specialists - Putting money to work

It used to be that getting hold of money was the difficult thing to do when financing a business. Things have changed and, while money does not yet grow on trees, it is more available than it has ever been and the skill now is in making the new-found credit work as efficiently as possible.

In the insurance market, one of the ways in which improved access to credit has manifested itself is in the amount of premium finance that is on offer to brokers and their clients, while insurers are increasingly offering instalment options on the payment of premiums. In looking at premium finance and insurers' instalment schemes, there are different priorities at work in each and, for brokers assessing the best option for their clients, a number of considerations need to be made.

In offering instalment payment of premium, insurers are essentially driven by the need to provide a choice to their clients in how they pay. It offers the ability to deliver a service to customers and also provides a steady income throughout the year, helping to avoid peaks and troughs in premium revenue. While the premium finance market is also driven by the provision of service, the lending of money is its primary function and, thus, the commercial dynamics of each business are very different.

Despite the differences, both claim to offer excellent service and Donna Lovewell, head of Norwich Union Direct customer accounts and central credit management, says: "One of the benefits is the efficiency of the process and, whether you are securing a renewal or new business with us, the instalment record can be set up immediately and any issues will be directed to NU for resolution and could be effectively managed internally between various departments. If a broker is involved, then they can complete the transaction with their customer, take all of the instalment details and pass those to us with the data regarding the policy, thereby completing everything in a single transaction. I believe we offer a very good service in terms of response times to customer queries and they would be able to receive their response straightaway instead of having to perhaps spend time contacting the finance house involved."

Tesh Patel, corporate development director, Royal & SunAlliance, agrees and comments: "It is a service to our customers to make it easy for them. We did a fair amount of research and, particularly for our smaller customers where cash flow is generally always an issue, the research found that managing cash flow was one of the most important things and so instalments were really important to them."

Instalment schemes

While neither insurer will be drawn on exact figures, both say a significant amount of business is now done on instalment schemes. Client service may have been the driving factor in offering these instalment payments, but insurers are not operating on a charitable basis. Looking at the difference between what insurers can offer and what third-party premium financiers have to offer makes interesting viewing in terms of the basic rates involved.

Kevin O'Flanagan, managing director at aascent, says there can be some significant differences in the pricing of the money available. He explains: "For personal lines, the going rate for an insurer - I am talking flat rate - is around 8%. For a personal lines case, a third-party provider would probably charge between 4.5% and 6%. For commercial lines, insurers are charging around the 6% mark and, depending on the size of the premium, the third-party providers would charge between 3% and 5%. There is the odd occasion where an insurer is trying to promote a line of business and they will offer what they call interest-free facilities, although that is effectively taken into the price of the insurance itself. In a soft market, this tends to increase. It is impossible for us to compete with that. That is unless the broker can get a discount in the premium and the discount is more than what we would charge."

While these figures may be generalisations, Patel confirms that RSA charges a flat rate of 6% for larger commercial clients, while Lovewell says NU charges 8%.

However, while insurers may make their margin on some of the larger commercial business, some of the smaller businesses benefit from the interest-free rates the insurers can offer. As Patel says: "We made the decision to offer not only instalments but also interest-free instalments and we offer that to the sole trader and small business segment."

For brokers looking after a client's affairs in this market, it is obviously very difficult for the premium finance houses to compete on price but, in terms of service, there are still options. While insurers are keen to push the ease of their offering - the benefit being a single provider for both the credit and the insurance - this is the very point that creates problems for firms using multiple insurers.

Kevin Young, managing director of Argyll Insurance, comments: "Insurers can provide interest-free finance and, obviously, that is fairly attractive. The problem is that, if you have a lot of commercial clients who have more than one insurer on their portfolio - as we do - then instalment plans become a bit of a mess because if there are three, four or five you have got to have that number of plans. If you do it with the finance house then you can have one agreement and that covers the whole portfolio of insurances. If it is a small case where you are only looking at a single commercial combined policy with an insurer, then there is no problem opting for the insurer instalment plan. However, if there is more than one class of business and, therefore, potentially more than one insurer, it is a lot easier for the client to fill out a single premium financing form."

Client inertia and retention

The insurance industry has always traded hard on the inertia of its clients. Ironically, this is now playing into the hands of the premium finance industry, which can offer brokers the option of keeping a single financial arrangement in place for their clients to pay their insurance premiums, while making sure they can chop and change at renewal to secure the best cover and premium available in the market.

Bob Darling, managing director of Singer & Friedlander, explains: "Brokers are really focused on client retention and, at the end of the day, one of the strengths of the insurance industry in customer retention is inertia. If you can seek out the best deal by going to the whole market and provide complete flexibility, but maintain the inertia by putting it all on premium finance with the same company and getting a rollover there, then you are getting the best of both worlds."

Currently, the third-party premium finance market and the instalment offerings from insurers have remained very separate. There is no doubt that the premium financiers would like to get involved and Darling says: "We have had one or two conversations with insurance companies and there have been one or two small schemes set up in the past, so it is not unheard of. However, as far as I know, there are no really big ones out there at the moment. We would be really keen to do something like this for someone and I am sure I am not alone in that."

However, while premium financiers would undoubtedly like to get in on some of the larger insurer schemes being run, it seems unlikely to happen. Lovewell says: "We see instalments as being very much a key aspect of our collection proposition in terms of being able to offer customers an efficient process and a good service. There is also the ability to be able to flex the instalment charges dependent on the customer in terms of their claims history, payment history and that type of thing. We definitely value it as a proposition and we are very much focusing on looking at that proposition at the moment."

Indeed, with NU looking to pay brokers introducing business to its instalment schemes, there can be no denying the appetite it has for the business and the fact it is now being seen as not only a customer service, but also a genuine revenue stream. Lovewell says: "For personal lines motor, business brokers receive a percentage of any existing business they have on our instalment scheme and any new business they put on our instalment scheme. Although it has not been formerly communicated, we are shortly to commence that for household business also."

Brokers will welcome the opportunity to earn commission in the lean personal lines market and the move will certainly counteract the premium financiers' commission payments to the broker, although whether the payments amount to a worthwhile revenue stream will depend on the volumes being traded.

What is certain is that the insurers are unlikely in the immediate future to outsource the handling of their instalment payment operations to third parties. They remain core to their strategies and as Patel comments: "It is part of our processes and it is embedded in the way we do our accounting, so we have no plans in place to change it. It is a really important service that we provide, particularly to our smaller businesses."

Outsourcing

One exception to this is perhaps where large providers have subsidiaries operating in the premium finance sector. Nick Elliman, head of business development at Finsure, says: "There are certainly opportunities for insurers to outsource to premium finance providers. Indeed, Finsure administers the credit scheme of its parent company, insurer NIG. A key benefit for the insurer is that it frees up capital that would otherwise be used to fund their in-house credit scheme. It also allows the insurer to focus on growing its core business, allowing specialist credit providers to remove the administrative burden from them."

The arguments to outsource have been seen many times in their various guises, and it is unlikely there will be a large-scale move towards outsourcing the credit control function operated by insurers at present. As seen, it generates revenue, offers customers a service and is regarded as a growing area in which they can differentiate themselves from other providers whether in offering interest-free instalments to the small commercial market or commission payments on some personal lines.

As insurers push further into this area, it is likely they will find cheaper ways of lending money and more hooks with which to try and retain their clients. Whether they manage to match third-party premium finance providers remains to be seen. As Elliman comments: "Premium finance allows brokers to negotiate credit scheme terms with their provider that are appropriate for their customer base, rather than the standardised arrangements typically offered by insurers."

While the credit market remains so hotly contested brokers should ensure they not only have excellent arrangements in place with the premium finance houses to run their own credit schemes for clients, but that they are making the best of the new initiatives being brought to market by the insurers.