As agents cope with this prolonged soft market they have an opportunity to add significantly to their income stream by establishing a premium finance company. Many agencies have been slow to take this step for fear it will be too difficult or time consuming. Those fears can be overcome with the help of outside experts in setting up a premium finance operation. An agency can expect to earn a return of 25% to 40% on its investment in premium financing, year-in and year-out with little risk.
A good rule of thumb is if an agency finances premium of at least $1 million per year, it should seriously consider establishing its own premium finance operation.
How can premium financing work to the agent's advantage? If a policy is direct billed, the agency will earn its commission over the billing cycle or as the insured pays. If the premium is billed by the agency, however, and the premium is financed, the agency will earn its entire commission up front. By choosing premium financing over direct bill, the agency gains greater control over its cash flow management.
Premium finance companies exist in a variety of forms. Some are bank-owned, some are independent, and some carrier-owned. When an insured arranges for premium financing, he/she submits some kind of a down payment (20% to 25% in most cases) and the remainder is financed over 9 or 10 months. Once the insured signs the finance agreement, he/she is giving the finance company power-of-attorney to handle the billing.
The finance company then forwards the balance of the premium to the insurance company and begins billing the insured in monthly installments with an interest charge added in. If the insured fails to pay the installment, the finance company then has the right to request cancellation.
Some agents feel they do not have enough time and resources to get involved in premium financing. To get past this hurdle, they can partner with a firm that specializes in providing agents with outsourced administration services for an agency's in-house premium finance company. Input 1, LLC, based in Woodland Hills, California, specializes in such outsourcing. Input 1 provides full back-office loan administration, software, Internet account viewing services and consulting to more than 80 premium finance companies in three countries.
According to Todd Greenbaum, CEO and president of Input 1, "With a captive finance company, agency personnel process financed premiums just as they do with outside finance companies. Agency principals do not need to train their staff, nor do they have to manage the day-to-day operations. In short, by outsourcing the back-office, the agency does not bear the burden of running a premium finance company. What the agency does get are the earnings generated by this new profit center. Although we work behind the scenes, we make sure that the agency principals understand what we do for them so that they have confidence in us and can concentrate on their insurance sales."
Some agencies prefer to take premium financing to the next level and handle the administration themselves. In these cases, firms such as Input 1 offer software that can perform front-end quoting and back-office administration for captive premium finance companies.
As for the staff resources that must be committed when an agency implements the software program, consider this: An agency that finances 100 contracts a month would be handling an average of five per day. A staff member can quote, enter and process a loan in as little as 10 minutes, which comes out to less than an hour per day.
Although an agency that sets up a captive premium finance company can expect an annual return on investment in the 25% to 40% range, its annual return may be much higher. The return is influenced by factors such as the size of premiums, number of cancellations, down payments and the interest rates charged.
"Owning our own premium finance company has afforded us many benefits, both at the retail and wholesale level," says Richard J. Acunto, CEO of Survival Insurance Brokerage, Guardian General Insurance Services and Infinity Acceptance Corporation, based in Los Angeles. "The capture of an additional revenue source which is traditionally lost has enhanced our bottom line substantially. Our decision to utilize Input 1 to handle all our back-office processing for premium finance allows us the opportunity to remain focused on our core business activity, while at the same time increasing margin. Input 1's technology, products and customer service have far exceeded our original expectations."
Where to start
When an agency wants to establish a premium finance operation, it should seek out a firm that can provide the full spectrum of opportunities--either outsourcing or a software solution. The firm will initially help the agency establish a corporation, apply for a license and handle all legal work necessary in the agent's state. The entire process can take as little as four weeks but averages from eight to ten weeks depending on the state where the agency is located.
Once this initial setup is completed, the agency staff can begin sending finance agreements through its captive finance company.
Outsourcing. If the agency owner decides to outsource the processing, the servicer should handle all of the customer service, data processing, billing, collection and accounting functions of the premium finance business. All notices will be customized with the agency's new finance company name and logo. The agency staff simply uses front-end quoting software provided by the servicer and sends the signed agreements off to its virtual company located at the servicer headquarters.
The servicing company has an experienced staff that will take over and administer the program. This type of service will typically bear a per-loan fee to handle the cost of administration. These costs are variable and relative to the number of loans booked by the agency's finance operation. This means the agency pays for servicing in proportion to the loans it generates rather than a flat monthly fee.
Software solution. The agency owner may decide, instead, to handle the premium finance company administration in-house, utilizing its own staff. If this is the route the agency wishes to take, it can purchase the premium finance software and run it on the agency computers. In choosing the firm to provide the software, the agency owner should consider a firm that uses its own software. That way it can be assured that the software works and undergoes daily scrutiny. Along with the software, the agency should receive full on-site training and round-the-clock phone technical support.
General agents and MGAs also can benefit by establishing a premium finance company. Contrary to some beliefs, it takes very little effort to provide a billing option at point of sale. When the general agent or MGA places business through its own premium finance company, it eliminates the numerous verification calls and notices from multiple finance companies. In return, the general agent/MGA can close more deals, increase its income and provide another valuable service to customers.
In today's market, agents must look for every possible means of increasing their income and improving their bottom line. Establishing a captive premium finance company is a logical step, enabling them to capitalize on their current book of business.
The author
Chris Farfaras is vice president of sales and marketing for Input 1, LLC, based in Woodland Hills, California. He can be reached by e-mail at cfarfaras@input1.com or by phone at (800) 229-9822, Ext. 235. *
* Receive a 25%-40% or greater return on the capital investment, year-in and year-out
* Take more control of your customer base by establishing the billing parameters for your portfolio
* A captive premium finance company can assist you in the renewal process by credit-sourcing the good payers and sending renewal letters
* Build an additional income source without changing the way you conduct business
* Private labeling of the new finance company allows program agencies greater affinity with
their customers on specialized niche business.
©COPYRIGHT: The Rough Notes Magazine, 1999