Home / Analysis / Premium funding laid bare
7 September 2015
Premium funding is a crucial cog in the workings of the insurance industry that deserves much more attention.
That’s the view of Ross Hayward, Director of Queensland-based Premium Funding, who has released a “white paper” and broker survey aimed at lifting the lid on industry trends – something he believes has never been done.
“We’ve never drilled down and had a really close look at funding,” he says. “We wanted to show brokers some trends, and get everyone on the same page.”
The paper says with one in three commercial premiums in Australia funded, the industry’s important impact is often overlooked.
“We know the market is about $4 billion and there are roughly 270,000 commercial funding contracts written annually.”
Mr Hayward is happy to admit that – to the untrained eye – premium funding can be a little confusing.
“When I tell people what I do, they look at me blankly,” Mr Hayward told insuranceNEWS.com.au. “They think of their own arrangements and say, ‘Can’t you pay insurance monthly, anyway?’.”
The answer is that in the commercial insurance space you usually can’t.
So it’s no different to a bank loan? Wrong again.
What makes premium funding stand out is the fact it can usually be approved instantly, with almost no checks required.
This is possible due to the “cancelability” of insurance premiums.
If a client fails to make their payments, the cover is cancelled and the insurer repays the outstanding balance to the funder.
“The moment a broker produces a contract and it is signed, then the funding is in place,” Mr Hayward said. “It is the simplest form of finance I’ve ever come across.
“I fund businesses all the time that are under financial stress. It’s no problem.”
But if it all seems too easy, it isn’t. At least, not in a soft market.
Mr Hayward’s paper details a dramatic drop in premiums this year, across all sectors. This has hit premium funders hard.
“If premiums drop by 10%, then we are lending 10% less and margins are tight,” Mr Hayward says. “We’ve all been operating in an easy market for a long while, but the industry takes a big hit in the tough times.”
Conversion rates are also down.
“Businesses may have more cash available, or now that premiums are cheaper they may be able to pay upfront,” Mr Hayward says.
The survey shows only one-third of brokers offer a funding option with every contract, suggesting judgements are being made based on the amounts involved.
But the paper says brokers may be missing out on commissions by applying such “hard and fast rules”.
Offering funding can not only improve brokers’ bottom lines but can also build on relationships with customers.
“We have funded premiums of millions of dollars for companies that have no problem with cash but that love the easy funding option,” Mr Hayward says.
His biggest bugbear is that more than half of brokers are forced to use particular funders.
“There has got to be more work done on making the industry more open.
“The best outcome for the client should dictate which funder a broker uses, not whether you are part of a cluster group.
“It assumes that one funder is the same as another – and that is not the case.”
Mr Hayward concedes funders charge broadly similar rates of interest, but he says there are other ways to stand out from the crowd, such as technology, innovation and efficient processes.
One obvious issue for funders will arise if insurers start to offer monthly payment of commercial premiums.
But Mr Hayward does not see that happening any time soon.
“There are a couple of insurers that do it. But think of the cashflow impact, and insurers don’t really want the hassle of chasing monthly payments.
“Brokers also don’t like insurers to be in regular contact with their clients.”
The premium funding industry is as crucial to insurance as motor finance companies are to car sales, Mr Hayward says.
“They are absolutely integral. Without financiers, there would be no motor industry.”
And without funders, large numbers of business owners would be unable to afford their premiums.
The message for brokers is clear: give premium funding a little more thought. It deserves your attention.