With the insurance market expected to continue hardening into 2019, 14 out of 16 commercial lines are likely to see low single-digit to low double-digit increases in rates, according to Willis Towers Watson. Alongside a gloomy forecast for the global economy, independent insurance agents might soon become more familiar with the term “premium financing,” which enables insureds to make monthly payments on their premiums rather than paying the entire annual premium upfront.
A firming market that brings with it higher premiums, less capacity, and more restrictive underwriting conditions bodes well for the premium financing business, though agents and brokers are often unaware that they can profit from owning their own premium financing subsidiary, instead of giving this business away to another company.
“It’s a convenience factor for the insured – the agent can get the payments structured to where the client can make them over several months,” said David Gebhardt, chairman and CEO of COST Financial Group, which offers a unique premium financing solution to insurance professionals. “Under the current system of placing premium financing with traditional companies, the agent really doesn’t earn anything out of it. If they’re doing $1 million in financing, they may earn somewhere in the area of $5,000 to $10,000 for each $1 million that they’re arranging. In other words, they’re serving as an unpaid production source for a finance company.”
In fact, it’s against the law in some states for an agent to receive compensation from a premium finance company. Yet, in every state, agents can start their own premium financing company and earn higher profits from its operation.
That’s where COST comes in, by helping an agency to get their premium financing company off the ground, and earn $30,000 to $40,000 or more for every $1 million of financing they arrange. Launching the company might seem like a lot of work for an agency, and it can be if they have to obtain a license, buy software, and secure loan commitments all on their own. However, this load can potentially be lifted when an agency has COST’s Insurance Premium Finance Company Management System on their side.
“They own a company, they reap the benefit of all this additional profit, plus they also get the benefit of having their insureds pay over a longer period of time,” explained Gebhardt. COST will walk an agency through the licensing process, and provides all of the necessary forms and computer programs needed to get the premium financing function up and running.
Once the company is ready to go, an agent can simply go online using the COST system to complete and submit a finance agreement that goes right to their own premium finance company. COST then takes care of all of the backend work, performing administration, bookkeeping and management functions for the premium finance company and, in turn, the agency doesn’t need any additional staff or equipment to run the company. COST provides monthly management and accounting reports so that the owners of the premium finance company are kept up to date on the company’s operations.
The agency’s premium finance company has the same address and telephone number as COST, so borrowers interact directly with the COST team and not agency staff, which means crucial resources aren’t diverted away from the day to day work. Throughout the process, the agency is the one determining the down payments, finance rates and late charges, keeping legal parameters in mind, and is building a profitable business that adds to the agency’s overall value.
Any retail agency, MGA/wholesaler, or insurance company that already has a few years of business behind them is a great candidate for COST’s premium financing solution.
“What we’re looking for is an agency that feels they can generate in excess of $750,000 a year of financing or more – ideally in the area of $1 million a year,” said Gebhardt. “If it’s a brand new agency, they’re just not going to have that type of volume that they could put through their own finance company.”
