Some brokers see third party premium finance as an excellent means of making
additional money in a competitive market. Others, however, are not so convinced.
Ian Jerrum, managing director of TIFCO, discusses the issues.
Third-party premium finance has been in the UK for well over a decade; but it is still only a small minority of brokers who appreciate the benefits to themselves and their clients.
Premium finance is often regarded as a necessary evil – a stop-gap for when the client can't afford to pay in full and the insurer has no instalment payment facility.
It is also still seen as an additional administrative chore, rather than a lucrative business opportunity and a way of adding value to the service you can offer clients.
Historically, the reasons for this perception are not hard to find. The finance companies have only themselves to blame for the persistent lack of interest or understanding of what should actually be an attractive selling proposition.
An additional source of income for brokers hard-pressed to make a profit in an increasingly competitive market – should that be hard to market? Part of the problem is that in the past premium finance people have seemed to speak a different language to insurance people.
Drowning in jargon
The finance companies employ a whole lexicon of obscure and unhelpful terminology – add-ons, over-riders, adjusted rates, delinquency ratios, AERs and volume enhancements – hardly the best way to communicate the benefits of a product or service.
They haven't exactly helped their cause by delivering considerably less than faultless service over the years and often seeming unsympathetic to brokers' concerns over the sensitivity of client relationships (easily damaged by association with any below-par service).
In short, the finance companies have failed, by and large, to see situations from the brokers' point of view.
So, if you strip premium finance back to its basics, what have you gotNULL A facility whereby you are able to access money from a third-party provider for the eventual purpose of paying for the premiums on policies taken out by your clients.
You select the policy, or combination of policies, that best suits your client; the premium finance company forwards the necessary funds to you (typically after 28 days); you then forward the funds to the insurer (typically after 90 days); meanwhile the client repays the premium finance house by direct debit (typically in ten monthly instalments).
In the process, you stand to benefit in one of three main ways: firstly, by receiving a commission from the finance provider (how big a commission – if you choose to accept one – should be up to you to decide); secondly, through the payment of profit-share on accounts where there is a low default rate (i.e. your clients keep up their direct debit payments, don't go into receivership, or run off to start a new life in Rio de Janeiro); and thirdly through the investment of funds during the interval between receiving them from the finance company and forwarding them to the insurer.
When interest rates are high, this investment opportunity can prove highly profitable. In the present economic climate, however, you might do better to agree payment later than 28 days from the finance company in return for a lower rate on the loan – or alternatively to negotiate an early-payment discount from the insurer.
And no downside!
There really isn't much of a downside in terms of time and effort, provided you are dealing with an efficient and helpful provider (yes, they do exist now!).
Since February this year, it has also become possible to transact premium finance by EDI, reducing your administrative commitment still further, and ensuring total accuracy. One ancillary benefit of using a third-party premium finance provider as opposed to an insurer's own scheme is that it prevents the insurer dealing directly with your client and holding their financial records on file.
Clearly, then, there are benefits for the broker. But does that mean that you are exploiting your clients, feathering your own nest at the expense of getting them the best deal?
No, it doesn't, because not only do your clients benefit from improved cash-flow, from keeping their existing borrowing facilities intact, and from the convenience of funding multiple policies through a single direct debit (updatable at any time to include new policies) but, above all, they benefit because paying in instalments through a finance company can often work out cheaper than paying outright.
Pay now or laterNULL
My own company recently introduced a free software application that allows brokers to calculate in advance for their clients the relative financial benefits of financing versus paying cash. It's something we have been doing in-house for some time now; and the exercise has shown that for the vast majority of commercial clients in particular financing works out markedly cheaper – one key reason being that the premium finance charge can be offset against corporation tax.
Having spent all this time attempting to persuade you that premium finance is something very simple and straightforward, I will now risk undermining that message by saying that it can be if you want it to be a highly adaptable and sophisticated tool.
Provided you have a good working relationship with a flexible and forward-thinking provider, you can select from endless possible permutations on the same basic themes to help you, and your client, benefit to the full, whatever the prevailing economic circumstances.
Sound and simple
There can be much more to premium finance – if you have the time and the inclination to pursue it – but the basics really are very simple, and sound. If you haven't yet investigated the subject, or if you are only offering premium finance when a client specifically requests it, you could be missing out on a valuable opportunity to boost revenue and expand the scope of your consultancy service.