Sandy Maxwell says SMEs are increasingly turning to premium finance, but more could be using this technique to exploit their books
An increasing number of SMEs are turning to premium financing to pay their insurance premiums. According to a recent survey commissioned by Aascent, 63% of brokers believe that more SMEs are using premium finance than in 2001.
Tim Wilson, director of Close Premium Finance, attributes this partly to brokers looking for other areas of income as their income has been squeezed in recent years. They are also "looking for greater payment certainty".
Aascent's survey highlights the cost of credit as a major concern for 56% of respondents, but Wilson points out that many SMEs have turned to premium finance as "an additional line of credit. They haven't benefited from the soft market to the same extent as major corporates".
Kevin O'Flanagan, managing director of Aascent, agrees. He says the "big lumbering giants" are using premium finance less, so SMEs are becoming more important. He points out that working capital is tight for many SMEs and pre-paid insurance ties up working capital.
Premium finance is a way of releasing that working capital and means that it is effectively off the balance sheet as a form of additional financing.
O'Flanagan likens premium finance to a form of factoring insurance.
About 50% of Aascent's book is SME-related, while at Close the figure is probably more than 75%. Wilson says that many brokers are not sufficiently exploiting their books.
Close's research across 1,500 brokers reveals currently SMEs are only utilising premium financing for between 10% and 50% of their gross written premium. So there is a great deal of unrealised value out there.
Wilson advises that brokers with lower penetration levels can build their business by:
- Educating employees
- Positioning their offerings to include premium finance
- Offering staff incentives
- Identifying financial schemes across their portfolio that are more expensive than premium finance options and moving them to a premium finance provider
- Improving their marketing literature.
Wilson reminds brokers that the security of premium finance lies in its refundability if the customer defaults.
But Ravi Takhar, director of Bexhill, believes the benefits of passing on the risk have been "slightly over-exaggerated by current players in the market". Takhar contends that many premium finance providers lend to SMEs but the risk isn't passed on to the company, as they rely on the fact that if the borrower defaults they can cancel the agreement and seek a pro-rata clawback from the insurer. So "the risk ultimately lies with the insurer".
Bexhill offers brokers a different option to the traditional premium finance model. Takhar claims brokers who finance premiums using their own company can accrue profits two or three times greater than via conventional premium finance deals.
According to Takhar, Bexhill's offer gives brokers far more control over factors such as interest rates, and if clients miss payment, brokers have the flexibility to determine the level and duration of repayments.
Wilson says: "Brokers should not be too greedy on overrider levels and make the gross rate look too expensive." It is often preferable for brokers to lower rates slightly across their whole book to make more money overall.
He reminds brokers that many SMEs have a "stickability" factor. "Once they select a package, they will stick with it," he says.
Premium finance is suited to most types of insurance, and O'Flanagan says it is best sold as a whole package.
But Takhar advises: "Some types of higher-risk insurance, such as professional indemnity and contractors' liability, are less attractive to premium finance providers as pro-rata clawbacks are harder to arrange when insurers feel there is too much risk all the way through."
Brokers should also not assume that clients with unusual credit histories cannot obtain premium finance. Wilson says Close will often look at financing clients who have previously defaulted and minimum levels are not always a problem.
Also, contrary to some brokers' perceptions, start-up SMEs will be considered by some premium finance providers. O'Flanagan says Aascent looks at "underwriting the customer, as opposed to the entity". Aascent will take into account a client's previous credit history or their relationship with the broker.
So the trend for SMEs to take up premium finance looks set to continue.
Wilson says the market will probably harden in 18 months and insurers currently undercutting premium finance provides will "drift away".
Wilson calls on brokers to use the lobbying power of their networks to take control of financing from insurers and offer to lower the premium by placing it with a premium finance provider.
This can provide a clear win for all parties involved: the broker, the insurer, the premium finance provider and the SME client.