Caroline Jordan finds the premium finance market is highly competitive, predatory and secretive
The phrase dog eat dog could have been invented for premium finance. This is a ruthless sector where there is incredible competition to win brokers business and the rivalry and backbiting between providers is like an erupting volcano.
But, what is going on with the top dog right now and is its position looking a little rockier? For years, Premium Credit has been assured in its number one slot. But, it has recently lost a number of staff. It is said to pay well, but is a demanding environment where only highly motivated and driven individuals succeed.
And, last summer it was revealed that the business was up for sale. It is currently owned by Bank of America subsidiary MBNA and was understood to have been purchased for around £180m in early 2004. It is rumoured the Surrey-based business has a price tag of around £300m.
So, who is sniffing around? Initially, it was rumoured that buy-out groups were in the ’ ’ frame such as Phoenix Equity Partners, Bridgepoint and 3i. But, now the money is all on insurers and AIG, Norwich Union and AXA are all viewed as the most likely suitors in fact most pundits says AIG is the hot favourite.
When called, Premium Credit said it had no one in marketing and there was no response to further calls and emails. The company appears to have battened down the hatches. But, rivals are revelling in the uncertainty.
They say that if Premium Credit is bought by an insurer, this will pose challenges as far as conflicts of interest are concerned.
Premium Credit is the business everyone loves to hate. One source said: They are supremely arrogant and cannot be bothered with the press or marketing themselves. But, since it is said they hold as much as 60% of the market and perhaps even more, then this may be justification.
One source said due diligence is taking place which is why they did not bother to get in touch. And, it has to be said that Kaupthing Singer & Friedlander also did not return calls.
Certainly, though any potential problems for Premium Credit will be music to the ears of Close Premium Finance which is the market’s other major player. Sales and marketing director Tim Wilson says a change of ownership can be unsettling and may affect service levels.
“We have been a strong and independent business for over 30 years. The problems with an insurer buying a premium finance company is that there are potential conflicts of interest. Would brokers feel as comfortable handing over their client details?”
It has certainly rankled rivals that Premium Credit has held the Biba members approved scheme for years and market rumours have suggested other providers hardly see the point in pitching as it is a done deal.
But, a market source suggested that there had been some disagreements about the way the scheme has been handled lately although the exact reason is not clear. Biba technical manager Graeme Trudgill says it would not be fair to go into precise details other to admit that there had been some strong words between the two parties.
On the wider issue of why Premium Credit was selected he comments: “Premium Credit offers some great rates, it is reliable and is slick and professional. It has good IT and offers flexibility – members can pay their subscriptions as well as FSA levies through the company.”
He explains that he is a fan of premium finance primarily because it is a useful additional source of income, but insists Biba will check out the market every three years when the scheme comes up for renewal.
As a tip though, it is clear that any company should be prepared to go the extra mile – it is all about partnership.
Trudgill adds: “One strong point in favour of Premium Credit is that it always support our regional dinners, and so in turn it is backing Biba. Of course, at these dinners, it also comes into direct contact with members and I know it has picked up some excellent deals through these.”
But, there may well be brokers out there that are turned off the big providers altogether. ’ ’ So, is there an alternative? Bexhill Funding is a relatively new name on the block and is certainly a different concept.
Basically, it offers brokers the chance to run their own premium finance business. Some brokers may moan that using premium finance through an established third party provider means more administration, so the Bexhill option may not be for those who shy away from this.
Because of the FSA’s client money rules, it is necessary for the broker to set up a separate finance company with a dedicated bank account and once originator status has been granted, arrange for direct debit collections.
The software is supplied by Bexhill and it also supplies the funding. When it is the time to settle the premium payments with the underwriter, the broker’s finance company borrows the difference from Bexhill to top up the cash already collected and pays the money to the broker. Bexhill then starts collecting monthly instalments from the finance company from the following month.
Bexhill says that using this independent approach means more cash for its users. The broker has flexibility in setting the interest charged and is also able to substantially improve his income each time an endorsement or other amendment is made to a credit agreement.
Other providers have been quick to criticise the Bexhill model, saying it is too much hassle for most firms.
And, Linda LoCastro, marketing manager for RBS Finsure says: “One fact is that we don’t charge our customers for making changes to their agreement throughout the year, or if a payment bounces, whereas most of our competitors do.”
But, Olga Smith, Bexhill’s operations director is clear on the benefits. “There are brokers who want to be in control and have had enough of third party providers. We are there to offer support. We always hear that they are tired of the faceless service offered by others.”
She says she is used to the sniping in the market and comments: “This business is extremely aggressive, but you have to deal with it.”
Smith adds that success depends on the orientation of the broker – they need a strong desire to make it work. “You decide how much someone pays and over what time period, we take a small percentage and brokers can do very well.”
She explains that it is particularly straightforward for personal lines brokers. “With a lower premium, you can add on a higher margin, perhaps up to 12%. Of course, brokers still need to make sure they comply with the FSA’s Treating Customers Fairly principle and make sure information is clearly provided.”
John Upton, a director at broker Fairweather Insurance, is an unequivocal supporter of Bexhill. “It’s a doddle to use, although a little more work. We had no problems with our staff understanding the software, which just sits on everyone’s desktop.
“We tried most of the other providers in the market and they were either unpleasant to deal with or kept making promises which they didn t deliver. Bexhill are nice people and this is a better system for our method and of course we earn more.”
But, there is always a downside, as Wilson warns: “We have looked at models like this, but the worry for brokers is what if there is a default? Would they be able to take a sizeable hit, because they could be liable?
“Many brokers would sooner have a non-recourse action which the third party providers offer.”
It is understood that Bexhill was working with broker Goss, but this is now part of the fast-growing Jelf Group, which uses Close.
Wilson comments: ” I imagine that Jelf would have looked at Bexhill, but decided we were better in terms of risk.”
But, as one of the big boys, Close will no doubt have detractors too and smaller premium finance players insist that they are able to offer a more personal and superior service.
Mark Wooldridge, sales and marketing director for Amber Credit, says: “The big providers expect the brokers to dance to their tunes. But, there has been criticism that other providers cannot match their standards in terms of technology. This summer we will be launching a first rate system for our commercial customers, which we can now compete in this area head on.”
He says Amber’s stable relationship with parent Skipton provides financial security ’ ’ and a steady stream of investment in the business. “There is a lot about to happen. Watch this space as Amber is about to explode into action.”
Premium finance providers are certainly not shy about telling brokers they can make money from their loans. But, some brokers may argue that it is a much better deal for the client if they recommend where these interest-free deals from insurers are available.
However, here Wilson sounds a note of caution. Interest-free deals are not what they seem to be.
“The insurers will invariably just load the margin the broker should be receiving on to the policy. What is more, many brokers who have used insurer deals have found that there are screw-ups with the administration.”
Certainly, premium finance providers are fighting for every bit of business out there and no one is pretending it is easy.
Lloyd Hanks, distribution director at premium finance provider Aascent, says the sector is a lot less gentlemanly than the insurer market, but describes the sector as fascinating. He calls on providers to stop attacking each others and says: There is around £31bn of business out there and only £7.6 bn goes through premium finance providers, so there is enough for all of us.
Meanwhile, Hanks comments: “I m just back from Birmingham where we have picked up two Premium Credit brokers.We are doing well because we can genuinely say we provide a personal service. We are nimble and listen to what brokers want. Our business is 40% up on last year and we take on around 10 new brokers a month.”
Even so, he says the soft market is affecting all providers, which is why volume matters. “Rates are still coming down and of course this affects margins. We are all having to pedal a lot quicker.”
The premium finance sector has always been a savage battleground for business. But, the soft market is causing additional pressures. On the outside it would appear there is not a great deal to differentiate the various providers, and that once a broker has signed up there is little incentive to change.
The more anyone looks into this world, it becomes apparent that the sheer competitiveness of it adds vibrancy to what is mainly a dull number crunching industry. And that’s one reason for them not to be sent to the doghouse.
Nick Elliman, head of sales and marketing for RBS Finsure, says premium finance should be an essential part of any broker s product portfolio.
He says the sector has evolved considerably and comments: “Any additional administration work involved should be far outweighed by streamlined processes, increased renewal retention and extra earnings.
“New electronic solutions, such as EDI and secure web-trading, have greatly reduced the work involved in operating premium finance.”
And, he points out: “There are also extra opportunities for brokers to increase earnings by bundling together add-ons, such as legal protection, or fees. Also, should a broker choose to do so, it can opt for a non-recourse scheme, which means it will not be liable for any debt incurred by its customers.”
There are no overall figures on the numbers of brokers using premium finance, but according to Elliman, they are moving upwards.
At a time when consumers may have taken on a lot of unsecured debt, premium finance provides a more responsible way of paying for insurance premiums, as it is more finite, than credit cards, where the debt can continue to roll over.
It could is a sector where individuals are chewed up, where tails wag the dog or they end up in the doghouse. IT