How insurance premium financing enhances client relationships

Canadian brokerages aren’t taking full advantage of an opportunity to arrange premium financing for their clients, particularly for commercial policies covering broad-based risks. In Canada, only 15% of brokered premiums are financed. By comparison, the U.K. rate is 20%, and it’s roughly 35% in Australia, New Zealand, and parts of Australasia.

It can be difficult for commercial clients to write a cheque for the entire premium up-front. Of the 15% of Canadian financed premiums, approximately 95% are commercial premiums. So Canadian brokerages can increase their profit margins by stepping up their use of premium financing solutions beyond the current 15%.

Many Canadian P&C insurance brokerages arrange for their clients to pay the full premium amount through an insurance premium financing (IPF) company. Those offering IPF payment solutions typically follow one of two paths:

• Partnering with an external IPF specialist for either immediate referral to the specialist or as a white label service, each relying on the specialist’s expertise and operation; or
• Creating and operating a wholly owned IPF subsidiary.

Each option generates profit. In the first, the external IPF specialist will pay a pre-negotiated commission rate to the brokerage for the amount financed. In the second, the entire profit from the wholly owned subsidiary will be available as profit for the brokerage, and not just the smaller commission of the first option.

Reducing lender risk

An IPF company mitigates risk through its ability to cancel a funded policy and retain the paid-but-unearned premium.

This mitigation is established by maintaining a positive financial position ahead of the obligation. It’s achieved by collecting a down payment, plus the first installment, before the policy is funded (minimum retained premiums necessarily modify these parameters).

Automated portfolio monitoring is employed to ensure thresholds are maintained and concerns are quickly communicated to involved parties which allows time to reach a solution.

Benefits for brokerages

Brokerages also benefit. For example, IPF enhances the client relationship, since the broker works with the client to create a cash-flow-sensitive payment solution. This maintains the broker’s client ownership and control of their brokerage brand by providing a fully funded agency-bill solution.

The bundling of services to clients has been shown to improve client loyalty and retention. In contrast, should a brokerage defer to a carrier’s direct-bill solution, the client relationship would be relinquished with an increased risk of losing the client.

A key component enabling premium financing for a brokerage is the integration of an IPF system into the source broker management system (BMS). This eliminates the need for double entry of client and policy information. Management costs are also minimized since all documentation and approvals are handled electronically via email, SMS and e-sign contracts.

All loan re-payments made by clients are automatic on an agreed-upon schedule through pre-authorized debits or a credit card. Further, settlements can auto-reconcile into the BMS, including endorsements and renewals.

Insurance premium financing generates additional free cash flow, which can be used for training, technology, or improving profit margin. What’s more, the IPF process eliminates lost time collecting accounts receivable, negotiating with insurance carriers for later-than-usual settlement periods, and managing any direct-bill payment issues.

Benefits for clients

Clients benefit from IPF because the policies are fully funded, removing the risk of a carrier cancelling a policy for non-sufficient funds. Should a insufficient funds event occur with premium financing, an internal finance representative or a brokerage representative would work with the insured to remediate any issues.

Both commercial and personal lines clients benefit from premium financing due to the reduced cash flow burden of 10 smaller payments versus a single large payment. Also, pre-scheduled payments may be changed or pre-paid during the term. And, for commercial clients, the interest is tax-deductible.

Loan approvals are automatic within set limits, and the brokerage’s in-house financiers will be more aligned to the clients’ best interests compared to those of external third-party organizations. Plus, there’s ease of use: multiple premiums can be consolidated into one loan. The same is true for mid-term adjustments and rollovers at renewal.

Jeffrey Psiuk is an insurance premium finance expert with significant industry experience analyzing and building IPF companies.

This story is excerpted from one that appeared in the November print edition of Canadian Underwriter. Feature image by iStock.com/alexsl