Sponsored content: Ravi Takhar, chief executive at Bexhill UK Premium Finance, discusses the potential advantages for brokers that bring premium finance into their businesses
Hastings, One Call, Admiral, Granite, Atlanta, Markerstudy and many other successful brokers have all taken all or part of their premium finance business in house.
Perhaps it is something to do with maximising returns from their premium finance business. As the FCA has recently stated, the greatest financial returns from premium finance have been achieved by in house premium finance companies.
Not by Premium Credit, not by Close Brothers and not by brokers earning commission. The greatest financial returns from premium finance have been achieved by in house premium finance companies.
The default option for every broker in the UK has been to introduce their premium finance business to Premium Credit or Close Brothers and obtain a commission for the introduction. That is a perfectly acceptable way to manage your premium finance requirements.
It appears, however, that many brokers have determined it is not the optimal way to manage their premium finance business.
In the simple commission model, your finance provider lends £1m to your customers and pays you a flat commission on the £1m of say 5%. That earns you £50,000. A tidy 5% return.
Due to timing differences and the fact that a large element of the £1m is paid back over a 12 month period, to finance £1m to your customers, your finance provider has only actually put out £500k of its own money.
If its net rate to you is 5%, it has made £50k on a £500k investment, that is 10% – double what the broker has made on the same lending.
Isn’t the lender taking the risk to deserve to earn at least double what the broker earns? Well, the lender is taking no risk on full recourse business and very limited and defined risk on non-recourse business.
You will know the requirements of the lenders on non-recourse business – they are onerous and their losses are nominal.
Is it possible?
Doesn’t the lender deserve the return because it is taking all the regulatory risk? Lending to limited companies is not regulated in the UK.
There is, therefore, no consumer regulatory risk in that lending. If the lending is to consumers, there is regulatory risk, which is well defined and can be managed with good systems and controls, as has been proven by the many in house premium finance companies operating in the UK.
Some companies, such as ours, can also take all the regulatory risk of the lending and still provide the economic benefit of the lending to the broker.
Many assume that only large brokers can possibly create in house finance operations to service their customers. This is not true. Relatively small brokers can benefit from taking their premium finance in house. We believe that any broker conducting £500,000 or more of premium finance would benefit from adopting an in house premium finance model.
Many may think it is not worth the effort to even think about it when Premium Credit and Close Brothers offer such a simple solution.
But what happens if Premium Credit or Close pull out of a market? What happens if Premium Credit or Close don’t want to finance your customer? What happens if your client is not being looked after by your premium finance provider?
What if you want to maximise your returns from your premium finance business and maximise your control and service to your customers?
As some of the most successful brokers in the UK have discovered, the best solution is to take your premium finance in house.
