Agents Can Secure Clients With Loans
In uncertain times, insurance takes front and center stage. Recent world events have tragically reinforced the need for all companies to be fully insured, especially in securing coverages that impact business recovery and continuity. At the same time, we are in a hard insurance market, one that we expect to continue for some time.
In addition, banks and other lending sources are taking a much closer look at the credit quality of their portfolios, reducing their exposure to weaker credit risks and non-traditional products.
This market scenario is shedding new light on premium financing, a means by which businesses can finance their insurance premiums, thus avoiding the draw-down of strategically important revolving lines of credit and conserving working capital for other critical needs that can not be easily financed.
Premium financing helps an independent agent make insurance coverage more affordable for their clients, encouraging them to be fully insured. This includes small and family-owned businesses, larger firms, major corporations, non-profit organizations, or individuals with specialized needs–including those with unique personal property assets, as well as professionals, consultants and investors. In todays "at large" employment and career marketplace, personally acquired coverages have assumed a heightened importance.
For agents, in a market where premiums might rise 25-to-50 percent or more, premium financing can make or break a deal by making premium increases more palpable to clients and providing an opportunity to sell more insurance.
In todays low-interest climate, we expect premium financing to prove increasingly more attractive to companies of all sizes across a broad range of industry groups.
While many products we buy come with the opportunity to finance– from a set of new tools at Sears to our family or business vehicle– many insurance agents are unfamiliar or perhaps uncomfortable with the idea of financing the end "product" they sell, the insurance premium.
As an agent, you might say: "Finance the premium? I sell insurance. I am not a bank." But premium financing can be an important element in your full-service approach to clients.
First, we must realize that all businesses require maximum flexibility in cash flow management. Next, comprehensive insurance protection, including important liability coverages, can represent a substantial expenditure.
From the insureds viewpoint, this expenditure is comparable to many of its other recurring costs, for which financing is routinely accepted as a valuable financial management instrument– one that allows a company to properly balance its cash flow in support of its strategic business plan.
Thus, companies are already quite familiar and accepting with financing different components of their operations.
Within the specific area of the clients insurance coverages, premium financing might offer agents several additional options for presenting coverages to the insured, such as:
Financing is generally available for all types of policies from carriers rated "B-plus" or better.
Insureds can typically choose from customized monthly payment and down payment programs.
Insureds can consolidate several coverage premiums into one payment program.
With premium financing, customers have the assurance that their premiums are paid and in-force, already fully budgeted for the fiscal year.
Premium financing is a valuable credit tool for companies familiar with revolving lines of credit or other sophisticated business financing strategies, such as equipment leasing, asset-based lending or receivables financing. This comparison might help companies understand and appreciate insurance coverages as a necessary and ongoing component of their businesses, as opposed to a "pay and forget" line item.
How does it work?
While premium financing has great value for companies and can help agents sell more and better coverages for their clients, it is a specialized type of financing. Most banks and traditional lenders are not familiar with premium financing and are unlikely to incorporate it into a lending portfolio.
For this reason, specialized firms have evolved to handle premium financing. Many of them are subsidiaries of, or related to, larger insurance entities.
While the largest independent agencies can create their own financing subsidiaries, we believe there are many advantages to working with a specialist in premium financing–one that understands the specialized risks, has the necessary and dedicated servicing capability and also has established relationships with as many underwriters as possible.
An additional consideration is that entities conducting premium finance activities must maintain minimum capital requirements and obtain annual licenses to do so on a state-by-state basis.
The advantages to working with a premium financing specialist include:
Insurance agents will normally achieve maximum cash flow for their own operations. Once insureds pay an agreed upon down payment to the financing entity, agents will normally receive their commission, in full, up front. The premium financing company is responsible for paying the policy premium to the carrier.
The premium financing entity bears the costs of, and responsibility for, collecting the premium from the insured. Should an insured default on payments, in most cases, the agent bears no liability to the underwriter.
The premium financing company handles the administrative, payment processing and customer service tasks, which can be a considerable time and cost-saver.
Agents can receive regular reporting with respect to pending cancellations, cancellation requests or other customer status updates, which may impact coverage in force.
The premium financing company can handle the financing of endorsements and renewals, and the disbursement of renewal commissions to agents.
Moreover, the premium financing industry is best equipped to assess the credit risks of companies with respect to insurance. Thus, underwriting criteria for loan approval might differ from standard bank rules, allowing for more flexibility in the credit approval decision.
This might allow agents to provide financing for increased coverages for "hard-to-finance" seasonal businesses, startups or highly leveraged firms with temporary out-of-balance cash flow.
Arrangements might even be possible for short-notice, non-rated Chapter 11 coverages and situations.
In the days ahead, we expect premium financing to be an increasingly important selling tool for agents and a strategic option for businesses. It can be an excellent practice builder that cements relationships with an agent's most valued accounts.
Jason Marx is vice president-operations for The Kaufman Financial Group, owner of Royal Premium, offering premium financing in 36 states. For information, visit www.royalpremium.com.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 11, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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