Premium financing option boosts agency income

Three providers discuss advantages of agency-owned finance companies

By Phil Zinkewicz

When the property and casualty insurance marketplace is in a “hard” cycle and rates for commercial insurance soar, independent insurance agents and brokers usually find that their clients are anxious to finance their insurance premiums so as not to have to lay out too much money up front. Today, however, the commercial insurance marketplace is softening, with the exception of properties in coastal areas in the Northeast and Southeast. Does this mean that insured interest in premium financing is on the wane?

Experts say no. They say that, even though rates in the regular marketplace may be dropping somewhat, premium financing is still an attractive option for commercial insureds who prefer paying for their coverages on a periodic basis rather than all at once.

However, for some agents and brokers, premium financing is still uncharted territory. One way for an agency to go is to strike a deal with a premium financing company where that company will finance the agency’s insureds’ premiums at a certain rate of interest. This amounts to little more than the agency introducing two parties and then getting out of the way.

Another way to go, however, is for the agency to set up its own premium financing company. Why should agencies go to all that trouble? “To create an additional profit center,” says Mike Gallagher, president of Premium Financing Specialists (PFS), a consulting firm based in Kansas City, Missouri. “PFS offers a variety of options to assist agents and brokers in starting up a premium finance company. The key is to develop a relationship with your premium finance vendor and evaluate which is the best avenue to pursue,” he says.

PFS was founded in Kansas City in 1977 with a single office. “Since then, we have either opened or acquired several branch offices and expanded our marketing force nationwide, not only to remain competitive but also to represent the hometown flavor of different regions within the country,” Gallagher points out. “We recognize that the insurance industry is regional by nature, which is why we developed our branch office concept. With 22 full-service branch offices and marketing representatives throughout the United States, the PFS team has the ability to understand the individual needs of each agent and broker.”

Gallagher says that, over the years, his firm has assisted many agents and brokers in forming their own premium financing companies. “Our clients range from the small, rural Main Street agency to the large national brokerage house to the insurance company.”

Among the company’s product offerings, according to Gallagher, are standard premium financing, customized branding finance programs and profit-sharing plans. The standard PFS premium finance program offers Web quoting, online producer and insured access to client account information, e-signatures (where permitted) and credit card payments.

“PFS represents a solid premium finance avenue for agents, brokers, MGAs and insurance companies looking to create a relationship with a vendor who still believes that, regardless of the market, people do business with people,” says Gallagher.

Another consulting group that specializes in assisting agents in forming their own premium financing companies is the St. Louis, Missouri-based COST Financial Group, Inc. David E. Gebhardt, president of the firm, says that some agents and brokers are fearful of forming their own premium finance firm, but, he adds, they needn’t be. “Agencies can profit considerably from owning a premium financing subsidiary with little or no administrative headaches,” he says. “Our clients generally earn between $30,000 and $40,000 for every $1 million they finance through their own company.”

Gebhardt says the reasons agents tend to shy away from owning a premium finance company are several. “They don’t know how to form and run the company; they don’t want to do the considerable back-room work needed for the company to function properly; they don’t want to hire and manage the staff required; and/or they don’t want their policyholders to know that it is the agency lending them money.”

That’s where the COST Insurance Premium Finance Company comes into play, says Gebhardt. “We have the expertise to run the premium finance company on behalf of our clients,” he says. “We do all the back-room work and perform all administrative, management and bookkeeping functions on an on-going basis. And the address and telephone number of the agency’s premium finance company are COST’s, so borrowers deal with COST personnel, not the agency’s.”

Gebhardt describes how the COST program works. “Once the premium finance unit is operating, the agents/owners complete a finance contract and submit it to their premium finance company, in COST’s office, where it is reviewed for accuracy and then processed. COST sends all monthly invoices or coupon books as requested by the agent or insured, as well as handling all late notices, cancellations, reinstatements and endorsements to existing contracts. COST receives all funds on behalf of the premium finance company, either directly or via lockbox and deposits them into a bank account set up exclusively for that premium finance company.

“COST maintains no check-signing or other authority over its account,” Gebhardt continues. “Furthermore, COST reconciles bank accounts and lines of credit, and prepares unaudited monthly and year-end financial statements. COST also prepares all monthly, quarterly and annual reports required by the state or states of licensing. Finally, COST carries both errors and omissions and fidelity coverages for its clients’ protection.”

Says Gebhardt: “Remember, it’s a soft market out there. When insurance rates drop, so too do agents’ commissions. A premium finance company can generate a new source of income. In addition, the agent is building a separate business. If there ever comes a time when the agent wants to sell his or her agency, the premium finance subsidiary will make that agency worth just that much more.”

Mike Wood, chairman of Automated Installment Systems, Inc., in St. Louis, Missouri, also says that many agents and brokers can benefit from owning a premium finance subsidiary. AIS offers the Epitome System that enables retail agents, MGAs and specialty carriers to establish and manage their own premium finance company.

“Third-party administration of agency, brokerage or insurer-owned premium financing companies is all we do. We don’t handle direct premium financing, nor do we sell or license our proprietary software. That allows us to concentrate on the technology side, which is what drives the operation.”

Wood says that when a client signs on with AIS to establish a premium finance firm, AIS handles all the billing, collections, accounting, balance sheets, banking, licensing, all the legal issues with state regulators, all the statutory notices—late notices, intent to cancel, cancellation notices, etc. “There is no need for the client to hire additional staff to deal with licensing or compliance or any of these issues,” Wood maintains.

Another important resource that AIS offers its clients is an internal auditor, according to Wood. “He works with client auditors, state auditors and the SAS 70 auditors,” says Wood. “We are Sarbanes-Oxley compliant.”

One agent who joined the premium finance industry congre-gation 15 years ago is Torrin Bottrell, president of Truck Insure, Inc. His agency owns National Finance Corp., a premium finance company set up by COST Financial.

“My agency has benefited considerably from owning a premium finance firm, not only financially but also in terms of my agency’s operations. COST does all the back-room work, but I remain in control, and that’s valuable to me and to my clients,” he says.

“Insureds who finance their premiums through XY&Z Finance Company are dealing with people who don’t know them,” Bottrell continues. “A missed payment and XY&Z is likely to just pull the plug and cancel the insured’s premium finance arrangement. But I know my clients. I know their equity situations. I can give an insured another 11 days to make a payment and waive late fees. Owning my own premium finance company has given me a good profit center, and it is well worth other agents and brokers considering.” *

For more information:
Automated Installment Systems, Inc.
Web site: www.automatedinstallment.com

COST Financial Group, Inc.
Web site: www.costfinancial.com

Premium Financing Specialists
Web site: www.premiumfinance.com