The decision whether to take premium finance in-house is not an easy one, says John Hancock
For the sector that pioneered outsourcing, developments in the insurance market – with a number of insurers and brokers bringing their premium finance in-house – have raised some eyebrows. As more and more businesses are deciding to focus intellectual effort on core capabilities, why are some brokers and insurers going the other way to add a peripheral function to their workload?
Peter Staddon, head of technical services at Biba, says that, for brokers at least, the addition of premium finance to their service is "a natural progression in the development of their relationship-based business for a number of virtual services".
Nevertheless, whether it's running against the flow of modern business practice or a natural progression of the way things have always worked, the question remains – why are brokers and insurers taking premium finance in house?
Olga Smith, head of operations at Bexhill UK, a company that provides brokers with the means to establish and operate their own premium finance business, believes that one of the key motivations is "to create more control and flexibility in the relationship with the client and to generate greater profitability from each transaction".
For insurers, it seems, the motivation is similar. They want to make their products more attractive and, often, will wish to establish a relationship of their own with the client.
For both brokers and insurers, control will be a key issue. A poor client experience (even if caused by a third party such as a premium finance provider) will always reflect badly on the broker or insurer with whom the client has the relationship.
Stories of poor experiences have fed a perception among users that third party premium finance providers can be inflexible in terms of the terms and rate of payment, as well as the interest rates that they charge.
However, Tim Wilson, sales and marketing director at Close Premium Finance, would dispute that perception. "We are in a competitive market and usually, irrespective of what a client needs, a finance provider can accommodate them," he says.
But if things have gone wrong in the past with a third party premium finance arrangement, the idea of taking the service in-house, may be attractive.
And the profit motive cannot be discounted. With soft money available in recent times, it may have seemed seductively easy to borrow at one rate and lend on to a client at a higher rate.
Apart from the advantage of having greater control over the whole transaction and being able to offer a degree of flexibility to suit each individual client, there is also the advantage of generating further value from each hard won client and transaction.
That may be gained from setting up a new finance business to provide a further income stream, another source of profit and, hopefully, capital growth.
Against these advantages must be weighed some potential dis-advantages. In the first instance, there is increased responsibility. Olga Smith says: "There is more administrative tasks, responsibility for debts, as well as for chasing late payments – but you cannot have something for nothing."
There is also more than a minimal degree of risk involved in running a finance programme. Of course, where a client does default on payments to a third party, there may well be financial consequences for the insurer or broker. But being responsible for the entire debt could prove a significantly larger worry.
And then there are further regulations and legislation to be dealt with.
But again, insurers and brokers may be familiar with the Consumer Credit Act and its operations, and will be more aware of regulation than they might wish to be.
For insurers, they may not always be as skilled at finance as they are in their core capabilities of assessing and pricing risk. And, while soft money may have made finance attractive in recent years, it will not always be that easy.
If all of the "On the one hand...but on the other..." statements above suggest to you that this is by no means a clear cut case, you would be right.
For a large insurance company in a group where either finance or banking businesses also operate, there may be a very good case for keeping all of the value generated by each client and each transaction "in the family".
For medium sized insurers and large brokers with a well honed administration capability, plus a strong financial position (if they're planning to self-fund their premium finance service) there may be a good business case for bringing premium finance in-house.
But for any business, and especially the smaller ones, there are some thoughts to consider.
Apart from the responsibility, the risk, and regulatory and legislation matters, brokers in particular, will need to consider a potential conflict of interest. This could arise from controlling the financing and the decision to instigate a transaction with its associated costs.
There will also be the little matter of having to source the money on a consistent and long term basis at a price that can generate a profit through the premium finance.
Insurers might also wonder whether they would not be better off freeing up the capital that could be tied up with such a scheme and simply allowing someone who knows what they're doing to run it.
If a client is in a reasonably solvent position and has reasonable financing requirements, most premium finance providers will wish to offer an acceptable arrangement.
And, given the experience on which they can draw, one has to ask, if they turn down a case is that not for a good reason?
The problem for an in-house facility is that good reason may be discovered too late to save a considerable loss. IT