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.
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.
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.
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
The future of premium financing in a nutshell
Nick Elliman Finsure development manager
Simon Pearce. Premium Credit sales and marketing manager
Richard Welsh Premium First business development manager
Tony Worthy, Singer & Friedlander managing director
Rob Fry, Amber Credit sales and marketing director