Premium finance is an excellent tool for brokers who want to be seen as more than just commodity providers. Ian Jerrum explains how to be a true financial adviser

In today's competitive climate, businesses are diversifying. Now, certainly in the personal lines market, insurance can be bought from anywhere; banks, high street supermarkets and retail stores. For commercial insurance, hardening rates are providing a real threat to brokers' business. Not only are businesses shopping around for the cheapest rates, but some insurance companies also have been reducing broker commission rates.

So how do you tackle this threat to your own earning potential? One key way is to ensure that you are not perceived as a commodity provider. Instead adjust your position from being simply an insurance broker to taking a more active role in providing sound financial risk advice. The scope for this positioning is especially great in the commercial insurance arena. But how do you do this?

Understand clients' needs
First, make sure you fully understand your customers' business needs. Being able to understand a client's own financial pressures and the impact of insurance costs on their cashflow will take a broker beyond being a mere commodity provider and into the realms of a true financial risk adviser. Offering premium finance as a means of funding insurance policies can play a valuable part in developing this role.

In the commercial market, many companies will use a number of different insurers for various insurance needs - from fleet and property cover to professional indemnity (PI).

Assess the cost of each individual insurance requirement and research the products and services that are most appropriate. Then review those costs and see where premium finance could play a worthwhile role.

Cash flow advantages
By using premium finance - spreading the load over up to ten months - a company can preserve its existing lines of credit for other business expenditure. This is a powerful advantage that will position you as giving your client a quality service - beyond merely quoting a good rate.

As interest rates remain low, there is an increasing demand from businesses to manage their finances on a monthly basis and this is where premium finance fits in. But it is up to the broker to show the client exactly what gains can be made.

Corporation tax relief on the finance charge can also make a difference to a company's cash flow and financing a premium over a number of months can actually work out cheaper for a client than paying the premium up front. By being able to show figures to the client, you are helping them to fully understand their own cash flow process and the client can then make a realistic assessment of finance versus outright payment.

Calculating the advantages`
So what are the figures you need from your client to be able to give them a clear picture of the cash flow advantages of premium finance? They are:

  • The actual premium

  • The down payment

  • The corporation tax rate

  • The finance charge

  • The rate of investment return.

    Once these are known, the savings can be calculated relatively easily and quickly.

    Good news
    Where premiums are on the rise and corners can't be cut, breaking the news to a commercial client that they will be paying ten monthly instalments of £1,700 is easier than quoting the full £5,000 rise from £12,000 to £17,000 on an annual basis.

    But funding needn't be just for one insurer's products. Third party premium finance providers have a massive advantage over insurers own finance schemes in that premium finance can be used to fund several policies with just one monthly payment.

    Benefits to the broker
    Obviously, you have the opportunity to earn commission. But as importantly you may also earn investment income during the interval between the finance company forwarding the funds to you and you passing them on to the insurer. And there is the protection from bad debts that you gain when dealing with a provider that operates a non recourse policy.

    An alternative to `holding on' to the finance is to pay the insurer immediately. Many insurers will offer a discount for upfront payment, so by opting to get paid by the finance house earlier, for example within 14 days you can negotiate a discount on the premium.

    Benefits from the provider
    How do you make premium finance work for you? At the heart is finding a provider that is flexible and supportive to your business that will allow you to benefit from whatever combination of commission and payment terms works best for you and your client.

    In the case of commission, for example, you will always be the best judge of what is an appropriate rate for any given client. One or two per cent is typical; but some brokers take 3%, 4% or even 5%. The important thing is to choose a provider that allows you to alter your rate of commission on a case-by-case basis. Some brokers decline any commission and make a virtue of passing the full benefit on to their clients - helping to build loyalty and/or justify a fee.

    A further way to make premium finance attractive - but at the same time still improving bottom line profitability - is to reduce the rate of interest by having the funds forwarded later than the standard 28 days. This will allow you more opportunity to charge a commission to cover your costs. But regardless of when funds are received, there is still interest to be earned before passing the money onto the insurer. That is, if you are not negotiating a discount.

    A growing opportunity
    It is believed that over 60% of brokers expect a higher proportion of their business clients to turn to premium finance to fund their insurance purchases in the coming year. But it is up to the broker to help businesses appreciate the benefits of premium finance by asking the right questions and the opportunity is enormous. By taking on the role as a financial risk adviser and offering clients good financial deals, you can enhance your service and reputation.

    Question 1
    Which of the following is an advantage of premium finance?

    a .Bigger commissions for the broker

    b.The client can afford higher premiums

    c.The client can preserve existing lines of credit for other business expenditure.

    Question 2
    Which of the following must you take into account in order to calculate the costs and savings for the client?

    a.The corporation tax rate

    b.The finance charge

    c.Rate of investment return

    d.All of the above.

    Question 3
    Which of the following could be an advantage of third party premium finance for the client?

    a.The premiums are cheaper

    b.Client can fund policies from different providers with one monthly payment

    c.Large discounts are available from insurers for upfront premium payment.

    This week's CPD was contributed by Ian Jerrum, chief executive of Singer & Friedlander Insurance Finance, telephone 01306 872666 or email

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