Until now the premium finance pie has been a meal for two. Jason Woolfe reports on the hungry new companies looking to steal a piece.

Bigger business

SELLING FINANCE DEALS for insurance premiums is big business. With personal lines generating a gross premium income of £16bn in 2000, it is a huge market. And despite being dominated by two well-established giants, there is much business to be won.

Close Premium Finance and Premium Credit control an estimated 85% of the existing market and expect to advance close to £3bn this year. This has not deterred others from joining the scrap for the remaining slice of the market. The next debut is likely to be that of Benfield Premium Finance, which plans to launch in the second quarter of this year.

Bold plans
Benfield chief executive Jeff Smith predicts within two years it will be turning over hundreds of millions of pounds.

It's a bold statement for a company that hasn't even started business and which is still waiting for the crucial software at the heart of its system.

His confidence is based on the belief that he has spotted a niche in the personal lines financing market and has a winning formula to exploit it.

Benfield says: "Insurers are getting more and more concerned about the return they achieve on their capital. They've been looking to outsource non-core activities and we feel premium finance is an area which could be outsourced."

If the business goes as well as planned, Benfield will turn to the wholesale debt market to finance its lending. But, as the world's largest independent reinsurance broker, the premium finance operation will have the backing of a business that generated $410m (£285m) of revenue in 2000.

The relationships it already has with the world's insurers, together with its industry knowledge, puts it in a strong position. But in the current hardening market, Smith's main headache is making sure the system is on the market as quickly as possible.

"Why it's taken so long is we have to have a level of data back-up and systems integrity. And that requires significant capital investment and a great deal of thought," says Smith.

He is not alone in believing there are opportunities in this market. Northern Ireland-based Premium First got into the open market last year.

Although its market share so far is negligible, all the business Premium First writes has been taken from established finance providers and it has already made inroads into the mainland market.

New player
Like Benfield, Premium First hopes to provide financing for insurers that currently undertake the work themselves. It is in talks with a top five insurer, which could net it £100m in turnover.

Business development manager Richard Welsh says: "Close Brothers and Premium Credit are massive. They dominate the marketplace. We don't want to be anywhere near that, but we aim to be in the second tier with a couple of hundred million pounds in turnover in the next five years."

The operation belongs to Open + Direct Retail Services, the company that resulted from the privatisation of Northern Ireland Electricity about five years ago and is ultimately owned by Viridian Group.

The next step
The group's background gives it three decades of experience in providing consumer credit and Welsh sees insurance as a logical next step.

Premium First launched its system with Open + Direct's network of brokers - it acquired four in the UK over the last 18 months - and began selling to other brokers about six months ago.

Premium First's service is internet-based. Like Smith, Welsh wants to offer technology that is easy to use and he is keen to meet brokers' needs.

So far the product is entirely non-recourse, meaning Premium First will chase the bad debts. But the company will offer recourse arrangements for bigger customers.

Premium Credit sales and marketing manager Simon Pearce isn't worried.

He says: "I'm a firm believer that competition is good. It can only keep us on our toes. We don't want to come across as arrogant. We will continue to grow and develop the product. But people tend to make premium finance too complicated.

"What we are doing is providing a loan to pay for an insurance policy. We collect a direct debit and pay the broker. However you dress it up, that's all we do.

"It has to be reliable and it has to work easily. And if we maintain the growth we've done over the last year, it'll prove that we do deliver."

One of the more established players fighting for the chunk of the market left by Close Premium Finance and Premium Credit is Singer & Friedlander.

Managing director Tony Worthy sees his operation as just behind the big two in terms of business volume, with about 5% market share.

He says Singer & Friedlander led the way by conducting business on the internet and sees electronic business as crucial to expansion. But he wants a third major contender to challenge Premium Credit and Close Premium Finance.

He says: "What we need now is another strong player. I haven't noticed any effect from new players on margins. Quite frankly, it's a growth market." n

Benfield's strategy to take a share of the market

  • A one-button approach will send a customer's data straight from a broker or insurer to the financers with no need to re-enter information
  • The product is aimed squarely at a few hundred introducers - brokers handling at least £5m of premium income and insurers currently writing their own finance
  • Benfield plans to be the only finance company to take out all human intervention
  • The white label system will maintain all brands, both between introducers and within them
  • It will offer real time information on all the business being done
  • It is a full recourse product. This means the introducer is responsible for bad debts, but if Benfield doesn't advise the introducer of a default within 48 hours, it will release it from this responsibility on the transaction
  • Specified service levels will be built into contracts with the introducer.

    The future of premium financing in a nutshell
    Nick Elliman Finsure development manager

  • Premium financers will need economies of scale and sound underwriting to gain as much from personal lines as the higher potential gains and risks of commercial lines
  • Smaller players will increase overall market share at Premium Credit and Close Premium Finance's expense
  • Finsure will maintain its position in the market - Elliman puts it at number three, with loans of £207m last year and half a million customers
  • Pricing will be critical with finance providers needing to be competitive on cost as well as quality. Jeff Smith Benfield Premium Finance chief executive
  • Increasing automation to bring down transaction costs
  • Increasing use of outsourcing to specialist providers
  • Individual deal values staying fairly low in personal lines
  • A small number of specialists will grow their market share significantly over the next two to three years
  • Some insurers and brokers who currently write their own finance will withdraw from the premium finance market
  • The finance market will grow in line with the amount of premium written for personal lines.

    Simon Pearce. Premium Credit sales and marketing manager

  • Premium finance suppliers will have to differentiate between themselves through quality of service rather than through their products
  • Reliability is the most important quality to the user
  • Even more players will join the premium financing game. But some will leave
  • No major changes in the structure of the market

    Richard Welsh Premium First business development manager

  • Rising premiums will fuel demand for finance as more customers want to spread payments over time
  • More competition as other players get into the finance market.

    Tony Worthy, Singer & Friedlander managing director

  • The company doubled its business last year and expects itself, and its competitors, to do the same this year
  • Growth will come partly at the expense of the big two, but partly from new business
  • Brokers will see the chance to make money from the commission on selling finance
  • As long as a broker keeps a client, the business should renew automatically each year generating commission regardless of changes to the insurers used
  • Emphasis will be on better relations with brokers rather than on major product changes.

    Rob Fry, Amber Credit sales and marketing director

  • Penetration of the personal lines market will grow by 50% in the next 12-18 months
  • Quality of service will be a crucial differentiator between suppliers.
  • Smaller players will grow their market share
  • The internet will become increasingly important, but should be seen as one of many possible distribution channels.