Form Your Own Finance Company
Medium to Larger Insurance Agencies, Wholesalers and Managing General Agencies Should Consider Having Their Own Finance Companies
Insurance Premium Finance is estimated to be a $25+ billion industry. The premium finance business can be very profitable and premium finance loans are usually very secure. If you finance or can direct a sizeable amount of premium finance loans, you should consider forming your own premium finance company or entering into a premium finance profit sharing arrangement.
Finance Charges: Interest charges on premium finance agreements are usually regulated by state statute but they can be very lucrative. In addition to interest charges, some states allow the charging of a set-up fee per finance agreement. Additionally, virtually all states provide for a late charge in the event that an installment is past due. Late charges can be a significant portion of finance revenue.
Regulation and Licensing: Most states have statutes and regulations governing premium finance loans and licensing requirements for premium finance companies. Licensing requirements may include meeting certain financial requirements, background information of company officers and management, a business plan, and approval of forms. Some states provide for a less extensive process for licensing of insurance agencies. Licensing times vary and can range from several weeks to several months.
Funding: There can be many funding sources for your premium finance receivables – owner capital contributions or loans, loans from third parties, or revolving credit facilities from banks or other lending institutions. Some premium finance companies also may provide a loan facility to your finance company. Generally, revolving credit loans will require that the finance company have a certain amount of equity or subordinated debt in the company to support the size of the loan facility, with the facility capped at a multiple of the equity / sub-debt. A number of banks provide lending facilities to premium finance companies.
Software: There are a number of software vendors that provide specific software solutions to the premium finance industry. The software programs generally include functionality for: quoting and printing of premium finance agreements, administration of premium finance loans including printing of all notices and letters, customer service functions, management reporting, and websites for agencies and insureds to access account information and make payments. Some software companies, as well as certain premium finance companies, have an outsourcing function where they will handle the administration of the premium finance loans for you.
Risk Factors: As in any loan business, there are a number of risks in the premium finance industry. Risks include: default by borrowers on their finance loan, financing of policies that do not provide sufficient unearned premium in the event of cancellation, insurance company insolvency, issues with agencies, etc. As with any industry, the correct underwriting guidelines, company policies, internal controls and management reporting systems need to be in place to help to prevent or minimize any losses that may occur.
Other Alternatives: Although you may want to participate in premium finance profits, you may not want to take on the responsibility of starting and running a premium finance company. There are other options:
Many insurance agencies and MGA’s receive referral fees based upon finance agreements referred to a premium finance company
Insurance agencies originating certain volumes of premium finance agreements can enter into a profit sharing arrangement with a premium finance company. A profit center is created from the finance business that is referred and you can earn a percentage of all finance company profits generated. This is done under the premium finance company’s existing license. A monthly or quarterly profit and loss statement will be generated for the profit center which may include finance charges and late fees, a cost for capital provided, bad debt expenses, and administration fees. Each arrangement is unique but they can be quite lucrative.
MGA’s and Wholesalers are more frequently participating in premium finance profits – some are affiliated with a premium finance company through common ownership or sometimes an MGA enters into a marketing arrangement with a premium finance company. This may include recommending a certain finance company to their agents or an MGA may even include a completed finance agreement to an agent along with each quote. The MGA can then be compensated through a referral fee or profit share arrangement.
Some existing premium finance companies have programs where they will operate your premium finance company for you, and may even provide the necessary capital. This option is usually available for entities generating a sizable amount of premium finance volume.
At Premium Finance Consulting, LLC, we can assist you with the setup of your own finance company including licensing assistance, software selection, assistance with obtaining funding, review of underwriting guidelines and setup of operations. Alternatively, we have relationships with several premium finance companies that may consider entering into a profit sharing relationship with you. Even if you are an agency receiving premium finance referral fees, we can review your referral fee structure to determine if your fees can be maximized.