Brokers must ’be cautious about offering recourse credit’ to struggling SMEs once ’the anaesthetic of furlough and support wears off’

Demand is up for premium finance, with nearly three-quarters (73%) of SME bosses paying for insurance using credit, according to premium finance provider Premium Credit.

Its latest Insurance Index report, which polled 291 SME owners and managers between 1 and 3 April 2021, found that the main reason for increased borrowing was the Covid-19 pandemic, although insurance premium hikes were also blamed by 36% of company leaders.

Ths trend was also noted in an Insurance Times webinar in association with Close Brothers Premium Finance, held in April, following the publication of a joint research project. This found that there has been a 40% increase in the demand for premium finance over the last year. 

Jon Howells, Premium Credit’s chief commercial officer, told Insurance Times: “Every sector is different, but many SMEs have been hit hard during the pandemic, with cash flow under particular strain as business owners have pulled out all the stops [just] to keep going through the lockdowns.

“As the vaccine rolls out further and normality returns, we continue to work at pace to provide relevant, effective, compliant and tech-led insurance payment solutions for SMEs, corporates and individuals too.”

Howells added that effective use of credit is one answer to improving cash flow.

Following the FCA’s PS21/05 premium finance rules published in May, Insurance Times further examines why more SMEs are relying on premium finance during the pandemic, how the insurance market has responded and why brokers need to be cautious.

Anaesthetic of furlough wearing off

During the course of the Covid-19 pandemic, SMEs in particular have been hard hit after being plunged in and out of national lockdowns as the UK government attempted to mitigate the spread of coronavirus.

Because of these fluctuations, Bundeep Rangar, chief executive at insurtech Premfina, has noted an uptick in the demand for premium finance, which is a method of spreading the cost of an insurance policy. 

Rangar said: “We have seen more interest with the pandemic onset for finance.

”We have seen this for SMEs and corporates, not just in the UK - we have demand for premium finance in other parts of the world, Europe included, because cash flow has become more of a concern when you have restaurants closing. Ultimately, premium finance is about making insurance more affordable.”

In May, Premfina launched a new ”Netflix-like” insurance finance app at Biba’s annual conference. The white-labelled insurance Finance as a Service (iFaaS) app aims to sell finance for insurance through an ongoing subscription or on-demand, in weekly or monthly periods rather than annually.

Bexhill Insurance, on the other hand, is offering brokers the option of using open banking to determine whether their customers can afford to spread the payments for a policy. 

Meanwhile, Mike Cranny, director at Create Solutions, said: “Small firms are increasingly more reliant on finance because of rising insurance premiums, falling revenues as result of the pandemic and an increase in bad debts.”

He predicts that when the chancellor of the exchequer Rishi Sunak withdraws the government’s pandemic-related financial support measures, many SMEs will sink.

Cranny warned: “Brokers need to be cautious about offering recourse credit and be vigorous about collecting money owed. This is important even with longstanding customers. The market is facing a potential tsunami when the anaesthetic of furlough and [government] support wears [off].”

Despite acknowledging that when there is financial uncertainty, such as around the fallout from the pandemic, premium finance demand is more likely, Rangar added that “if the insurance market shrinks by 10% or 20%, then you have got a bigger share of a smaller pie”.

He believes the market is likely to “shrink” as demand for certain lines change - for example, a reduced demand for motor insurance as people use their cars less during lockdown. 


Vehicle insurance


Property insurance


Employers’ liability insurance


Business interruption insurance


Cyber insurance


Key man insurance


Source: Premium Credit, Insurance Index, May 2021 

New obligations

A further consideration for brokers around premium finance post-pandemic is the FCA’s incoming PS21/05 rules, which will be effective from 1 October.

Cranny explained that following the introduction of PS21/05, premium finance will now be defined as an “add-on”.

He continued: “Brokers are under a new obligation to change finance providers if they are not offering value for money. They also will have to - on request - supply details to insurers of their earnings on finance and fees to enable the insurer to confirm [that] policies provide value for money.”

Some elements of the new rules are easy to understand, noted Cranny. For example, stating how much more expensive premium finance installments are compared to a one-off payment. However, other facets of PS21/05 are more complex and contradict current practices.

For example, brokers will need to evidence why their finance provider was selected, explaining why this particular option provides good value and that better offerings were not available elsewhere. So, if there was an applicable interest free scheme that the broker decided not to use, it would have to evidence why not.

He said: “Specific conflicts of interest rules warn a broker of the risks of accepting hospitality, training, or other benefits from finance providers.

”They are reminded of the duty to ensure the finance arrangement operates in the customers’ best interest and provides good value and fair outcomes. [Brokers should not be] swayed by the commission they earn.”

Transparency and fairness

For Branko Bjelobaba, principal at general insurance compliance consultancy Branko, the new premium finance rules are about “transparency and fairness”.

Brokers act on behalf of the insured and can be paid via a fee arrangement, or by a commission-based model.

Fee arrangements are generally negotiated and agreed between the broker and client - under the rules of the European Union’s Insurance Distribution Directive (IDD), the broker must notify the insured of the nature of this arrangement.

Commission-based remuneration, meanwhile, is deducted from the premium paid by the insured to the insurer.

One of the main concerns with the latter model is a lack of transparency.

“Premium finance is an add-on product and you simply can’t charge at renewal more than you would [for] new business. You have to tell customers how you make your money on premium finance,” Bjelobaba explained.

”They are sensible disclosures that an honest broker would have no problems making - everything [brokers] do should be in the best interest of the customer.

“If the broker understands [the] law of agency, you do not shaft your customer to make more money at their expense. Some brokers have access to schemes where they can crank up the amount of money they make almost on a sliding scale. That’s the bit that lacks transparency.”

However, premium finance can support brokers’ own cash flow as well as that of their clients, Rangar added. 

“Brokers spend quite a bit acquiring customers. Typically when onboarding a customer, [there] are a lot of one-off costs in the first year,” he said.

“The pandemic has forced more people and companies to be more prudent [around] their cash flow. Premium finance has become [a] very attractive opportunity for people to manage finance in a nervous environment.” 


What are the FCA’s new PS21/05 rules?

The FCA revealed new rules for premium finance on 28 May, which includes guidelines for firms that offer premium finance to allow their customers to spread the costs of their insurance payments.

Due to come into effect on 1 October this year, the PS21/05 rules will apply to all firms selling insurance products - not premium finance credit providers directly or premium finance arrangements without interest or additional costs to customers.

The rules, which were proposed as part of the FCA’s consultation on general insurance pricing practices that closed in January, do not require that insurance firms provide premium finance with 0% APR.

The new guidance states:

  • Premium finance sold alongside insurance provides fair value for customers and the costs associated with it will not detrimentally affect the value of the insurance product.
  • Any remuneration related to retail premium finance is consistent with the firm’s obligation to act honestly, fairly and professionally in its customers’ best interests.
  • Firms should give clear information about the costs of retail premium finance arrangements and make it clear that this makes the contract more expensive.
  • Firms should do more than simply ask the customer to choose between paying monthly or annually to ensure customers actively choose to take premium finance.
  • Firms’ remuneration arrangements in relation to retail premium finance do not give an incentive to offer retail premium finance with greater costs to the customer when an arrangement that is better aligned with the customer’s interest is available.