Caroline Jordan navigates the world of premium finance and sets out to discover what really goes on in this vibrant business
An interest-free scheme from an insurer is rarely what it seems, and might not serve the best interests of the client. This is because it's likely the insurer will have inflated the premium to compensate for zero-rate loans
It goes without saying that the broking market is competitive. And the current soft market shows how cut-throat the insurance sector is. This is clear to see when reviewing the world of premium finance.
No matter how much dressing up there is, a loan is a loan. So providers try incredibly hard to convince brokers to sign up. Simply offering cheaper rates is not enough. They need to supply nifty IT and smart service. They spend loads on advertising and taking brokers out to lunches, golf and other jollies. There is also - allegedly - a darker side. A number of brokers talk off the record about so-called incentives in the shape of cash if they'll switch.
One provider, who did not wish to be named, says: "They will say they will give the broker a cash payment amounting to several thousand but call it something like a three-year advance overrider."
Other brokers say even though they make it clear they already have an arrangement with one or two premium finance providers, they are constantly called by reps from rivals trying to arrange meetings. One broker revealed: "I've had several calls in a week asking me who does my premium finance. The sales staff won't take no for an answer."
Indeed, some brokers it seems are afraid to say who they have selected for premium finance in case the others start hounding them.
One high-street personal lines chain acted with near hysteria when contacted. The representative, who claimed he was authorised to speak to the press, was heard putting in a frantic call to his head office before he said: "No, I won't talk about premium finance, it doesn't matter who you call. We don't want to be mentioned in connection with this."
Breaking the silence
Commercial lines brokers were also largely reticent. So it was a relief when Simon Burgess, managing director of payment protection specialist British Insurance, was prepared to speak openly.
"Many customers want to pay by instalments and as a broker, I want to make buying cover easy. But, I'm aware of kickbacks going on and am unhappy about some of the practices of these firms - they are parasitical. It's usury and they aren't adding value."
But, he insists simply blaming the providers is not enough. "Rather than simply criticise the premium finance companies, which after all are not regulated, I blame the insurers. They could make independent schemes
irrelevant if they were able to offer flexible and lower interest rate deals. They could also offer more interest-free loans."
According to Burgess, the premium finance industry needs regulating, pronto. "How can you have high interest rates being charged at the same time as principles insisting customers are treated fairly? What if an interest-free deal is available and the broker still recommends the premium is paid via premium finance - should they not declare this to the client?"
But he doubts if there will be the clean up that he believes is necessary. "The FSA is feeble. It says the customer is king but is unlikely to put pressure on insurers to improve their offerings. I would like to see the regulator investigate this market."
On the other hand, there is an argument brokers are already being squeezed as a result of regulation and so are justified in earning a small income stream from premium finance. Clients also have the option of avoiding premium finance if they pay upfront.
There are brokers who say they are satisfied with their arrangements. Alan Russell, marketing and development director with Bruce Stevenson, says: "We have a good deal with Premium Credit, which was negotiated by Unitas, the alliance we belong to. The insurer deals are uncompetitive by comparison. A few insurers offer interest free, but we would still need to decide if the policy makes it worth it and it may also only be available for a limited time."
Tim Wilson, sales and marketing director of Close Premium Finance, comments: "More and more brokers are telling us they're thinking of using a specialist provider. It's not surprising - specialist premium finance is good news for the broker and their client. An interest-free scheme from an insurer is rarely what it seems, and might not serve the best interests of the client. This is because it's likely the insurer will have inflated the premium to compensate for zero-rate loans."
He argues far from being valueless, "premium finance reduces admin and paperwork for both the broker and their client. One loan can cover a number of policies, from different insurers. And policies can be re-broked or even adjusted mid term without the client having to fill in and sign new forms. Life's a lot easier."
Wilson says brokers are justified in seeing premium finance as an extra income stream. "Brokers can add an overrider margin onto a premium, which simply isn't possible with an insurer's own scheme. And in most cases, a broker can add an overrider and still match the insurer's rate. We've found brokers can make a substantial bottom-line profit from a policy if the insurer's own scheme isn't taken up."
Although the market is intensely competitive Lloyd Hanks, sales and marketing director for Aascent, says he will refuse to get involved in any mudslinging. He is new to the industry, having joined from insurer Allianz Cornhill. "I'm aware of the competition and some say there are unscrupulous practices going on, but I want to focus on changing perceptions of premium finance. It should be seen as a key part of the insurance offering and not a last resort. I would also welcome the industry being brought into FSA."
He says he has no regrets about joining the premium finance industry. "So far, it's proved a fascinating move and I'm convinced there is room for everyone. It's said the UK market is worth £31bn but only £7bn is spent on premium finance. I understand brokers and have total empathy with them and I want Aascent to be all about working in partnership."
Mark Wooldridge, sales and marketing director at Amber Credit, says while other providers try to poach brokers all the time, it is possible to secure loyalty. "We offer quick payment and competitive rates but having a common goal also counts."
He explains Amber seeks to be different by getting to know the brokers it works with. "We've probably been with Bennetts, for example, for around five years. We'll send a senior team over to meet their people on a regular basis to find out how we can improve what we are doing and to see what their needs are."
Wooldridge adds that Amber will launch a broker IT system early next year to increase its broker offering and is also increasing the amount of commercial lines financing it provides.
Meanwhile, Finsure has been in the news following research it conducted. This showed brokers were reviewing their premium finance provider on a regulator basis.
Its research - based on 100 brokers - showed that some 67% of these have reviewed their choice of premium finance provider in the last year, with only 5% of respondents saying they had not conducted any form of review in the last five years or more.
But the Finsure survey also showed over half of all UK insurance brokers had no strategy for maximising income from their premium finance provider.
Trevor Brittain, Finsure's managing director, says: "Our research suggests that although brokers may be working with a specialist third party, premium finance may be offered to clients on an ad-hoc basis, rather than being considered a core service, and therefore core income. So, even though use of a third-party premium finance provider is widespread, we assume that it is a lack of full understanding of the revenue earning opportunities that stops brokers from making it a core part of their business."
He says brokers are prepared to switch from insurer schemes if they know that the administrative hassle will be kept to a minimum. Other important factors, he claims, are financial security and service. "Both the broker and their clients need to know that their money is handled by a reputable company, which is not going to go under or be taken over at the first hiccup. Also some brokers may find they are too small relative to the whole to have their voice heard, with some larger premium finance providers."
The arrival of newcomer Bexhill now offers brokers an alternative to traditional players. This is used by a growing number of brokers, including Stuart Alexander. Bexhill provides the funding and IT but the broker has ownership and control.
The company claims this can be a more profitable option for brokers. The risks are that the broker has responsibility, including for bad debts.
It is understood that existing providers are closely following Bexhill's performance. According to Brittain: "If this were a route that some of our brokers would like to pursue, we would certainly consider it. However we believe that most brokers can operate more profitably by offering a scheme run by a third-party specialist, rather than getting involved in financing, which lies outside their core area of expertise."
One broker, Andy Lee, managing director of Outright, says his company avoids all third-party suppliers and runs its own premium finance scheme. "We get the funding from our parent, Fortis, and changed to this from a third party last year. It's more profitable for us and there has been no change from the customer point of view."
On the surface, premium finance providers focus on providing a valued service and making brokers more profitable. Behind the scenes, there is too much talk of bungs and underhand sales practices. There is smoke and mirrors in this market and this needs to be blown away before it can be categorically stated that everyone's best interests are being served. IT