Softening Insurance Market Putting The Squeeze On Premium Financers

"I would say that the market right now, in the environment that we're in with the softening market, favors the agency probably more than anybody," he explained, "in the sense that more companies out there are fighting over fewer finance dollars in the marketplace due to the fact that premiums are down and the entry of [standard carriers] back into the marketplace."

Mr. Smith added that in Florida, where he is based, two years of no hurricane activity has led to increased competition among excess/surplus and standard carriers in some markets, leaving premium finance companies to scramble to finance as many policy dollars as they can while the overall pie keeps shrinking with falling prices.

"So you're getting combined packages of rates and terms that are very competitive," said Mr. Smith, "and in states where rebating is legal, it's creating more revenue opportunities for the agencies as well."

Luther Grafe, executive vice president and chief operating officer of Bank Direct Capital Finance–a premium finance company based in Illinois–also sang the blues about the state of the current insurance market and its impact on firms like his.

"We've seen premiums down as much as 30 percent from two years ago, so there are some clients who have historically financed their policies who now can pay cash," he said.

"What's really happening is that, because of the soft market, some of the more mature companies are seeing that their financed premiums are way down from prior periods," he added. "So they're the ones who are getting, maybe more so than others, very competitive on price–almost giving the deal away, and/or terms."

"I think their logic is to maintain as much business as possible by presenting something to the insured to show they really want their business," he concluded.

In a typical market, Mr. Smith said premium finance companies will generally want 20-to-25 percent down, and a term of about nine months of equal payments.

The larger the insured, he noted, the more favorable the terms get, and premium finance companies could offer 10, 11, or even 12 months of equal installments.

"As the market's gotten more competitive," Mr. Smith explained, "the need for us to be more aggressive on term and rate has become a big factor."

How aggressive have premium finance companies become?

"To be honest, it's all over the board," said Mr. Grafe. "In today's marketplace, it's not uncommon to hear some of our competitors offering extremely competitive terms across the board without much consideration for the credit exposure. It gives the insured the best cash flow, spreading [the payments] out over the full year, versus a more traditional nine- or 10-monthly payment plan."

Some experts, while acknowledging that the market is soft, do not see premium finance companies competing to the point where their businesses will be in jeopardy.

"We've seen what happened in the mortgage industry when people lose sight of the long-term," noted Kurt Huffman, president and chief executive officer of UPAC, a premium finance company based in Kansas. "I wouldn't say that there's a great deal more competition. This is a mature business, and there is always a great deal of competition."

An additional factor is that the soft insurance market "is being somewhat offset by the depressed economy at this time," according to Jeffrey Granito, assistant vice president of Premium Payment Plan, based in New York, and Eric Sepci, the firm's vice president and chief operating officer, responding to National Underwriter via e-mail.

"When coupled, while the renewal premiums may be slightly down, the need for premium finance appears to be strong at this time," they added. "That said, the price decrease has not resulted in a decreased demand."

Suggesting just the opposite, however, was Larry Johnson, chief information officer of UPAC, who noted that competition in pricing is not affecting UPAC as much as the reality that, in the soft market, standard carriers write more risks, and clients are therefore less likely to need the services of premium finance companies.

"So that's the issue we really have to deal with. That's just how the industry is," according to Mr. Johnson, who added that as a result, "when it's a little tough, you just have to work harder to be better."

The strategies employed by premium finance companies in this challenging market vary.

Mr. Huffman agreed that the soft market makes growth for premium finance companies difficult, but he also said UPAC measures its results relative to the competition.

"What we try to do is do it better than the competition," he said. "The premium finance market–as well as the insurance market–ebbs and flows. So let's say we're up 5 percent one year, but all of the competition is up 10 percent–well, that's not very good. Conversely, if we're up 5 percent and everyone else is down 5 percent, then we feel like we did well."

"Our goal is to out-do the competition, not necessarily create the marketplace," he added. "You can't control if the market is soft or hard. What we can control is our response to it."

Mr. Granito and Mr. Sepci said their company has tried to be creative in terms and pricing as competition increases, and Mr. Grafe said that while the market is more challenging now, his company's goal remains the same–keeping existing business while competing on new business.

"We have to be that much more aware of and sensitive to the relationship because of how competitive our business has become," Mr. Grafe said. "We can't just take for granted that we've had an account for two, three or four years with an agency that's fairly loyal to us."

In other words, service goes a long way in this business, according to Mr. Smith, who warned that because prices and terms tend to drop across the board, most premium finance companies will not stand out on these factors alone.

"This market does give finance companies the opportunity to distinguish themselves from some of the other competition primarily in service or service-related aspects of their particular finance company," he said.

However, even in this regard, premium finance companies are somewhat limited in the types of new services that they can bring to the table.

"When you get right down to the nuts and bolts of what traditional insurance premium financing is–you have an insured, an agent and an insurance company who have a policy that needs to paid for–what really are you going to do differently?" said Mr. Grafe.

"You're going to require the insured to sign the loan document; the premium finance company is going to want to make sure they maintain their security interest in the policy and have the power to cancel the policy; and the transaction has to be funded to either the agent or the insurance company," he added.

However, he noted, "it's how you go about doing those steps that may change, but I have not seen any real unique services that have changed other than some technological enhancements that aren't necessarily viewed as services–just maybe a better way to do something rather than a different way to do something."

Mr. Smith noted that some of the benefits independent agents are seeing in this market include the increased willingness of premium finance companies to forgive late fees and avoid cancellations, as well as offer advances in technology.

This last point may be more of a continuing market evolution rather than a response to the soft market, but experts agree that agents are demanding new technologies, and premium finance companies are providing them.

"It used to be, when I started this back in 1999, the insurance industry was probably one of the more paper-based industries…but they have slowly pulled themselves out of that," Mr. Smith said.

Mr. Huffman–whose company, UPAC, stakes its claim on offering agents technology solutions to premium financing–said that "historically, the premium finance industry has been fairly technology-averse, again kind of reflecting where the majority of the insurance agencies were."

He noted that technology actually slowed agents down in the past, as most of the available solutions were meant for the carrier's benefit, rather than the agency's.

In the last five-to-10 years, however, Mr. Huffman explained, agents have taken advantage of technologies that have made it easier for them to do business, and they have embraced opportunities such as the Internet, broadband and other tech advances.

That said, not all agents are on board with the latest technology, according to Mr. Grafe.

"We still have a number of clients who pick up the phone, ask us for a premium finance quote, we take down the information, and then we either e-mail or fax it to them, depending on the technology that they have or want to use in their office," he noted.

However, Mr. Grafe added that "probably 95 percent of the deals that we receive" now are done over the Web.

When it comes to technology, the phrase of choice is "ease of use." According to Mr. Johnson, that can best be described as "a significant advantage that usually comes down to automation tools that make it easier for that agency to arrange business between their insured and the premium finance company."

Essentially, premium finance companies are offering any type of advancement, electronic or otherwise, that makes the overall process easier for agents and their clients. For example, Mr. Johnson noted that in the past, virtually no premium finance company accepted payment by credit card. Now, most of them do.

Beyond that, Mr. Huffman cited one-click renewals and one-click endorsements as popular services offered to agents.

Mr. Smith said agents want to work within their own agency management system software, rather than use a separate outside platform. Agents prefer to have a finance contract generated within their management system, where the fields of information necessary to complete the finance agreement–such as the address and policy terms–are automatically populated based on the agency's records.

"Everything that you used to have to do manually is now available on the Web, and [agents] are taking advantage of that when and where they can," Mr. Smith said.

Mr. Johnson agreed. "The agencies, especially in a soft market, are trying harder and harder to focus more of their time on sales and less on servicing the accounts, so all of these tools really enable their [customer service representatives] to play more of an account management role and less of a transaction processor role," he said.

But every agency is different, Mr. Johnson noted, and an agent who helps many clients finance their premiums will have different needs than one who only does so occasionally.

"The occasional users want a Web site that's easy for them to deal with," said Mr. Johnson. "They almost always finance with one finance company only, so they don't have a multisystem issue. They just want it convenient. But the large agencies that do it a lot, they're much more likely to be looking for integration-type technologies that keep them from having to do multiple input of the same data."

Seamlessly integrating the desired technology with the agency's management system has traditionally been an obstacle, but Mr. Grafe cited improvement there.

"I would say that it's better than it was," he noted. "The integration has been around for probably eight-to-10 years, and I think each year it gets a little bit better. There are still some sticking points that make it a bit of a challenge."

One problem he mentioned is with how an agent identifies a policy type relative to how the premium finance company identifies it. "Our system has its own list of policy types; the agency management system has theirs–and do you call it a GL, a general liability, or Gen. Liab.?"

Even a problem such as this, though, is not an insurmountable obstacle. "It can be overcome," Mr. Grafe said, "but it can become a bit of an issue."

Looking to the future, executives at premium finance companies seem content to ride out the soft market, and they do not see the current conditions jeopardizing their respective businesses. Mr. Grafe said that while it is a challenge to maintain or grow market share with policy premiums falling, he does not see any long-term dangers ahead.

Mr. Granito and Mr. Sepci also described future challenges as unchanged from those of the recent past. "Basically, everything that has challenged our industry over the past several years has gone relatively unchanged," they said.

Mr. Huffman cited hiring talent as his biggest challenge, rather than any concern about the soft market. As a premium finance company that relies on offering the latest technologies, Mr. Huffman said he needs to hire people with a high level of training, intelligence and aptitude in their roles. "The biggest challenge for us over the long term is people," Mr. Huffman asserted.