As a concept, the principle of financial inclusion involves ensuring that both individuals and businesses have access to affordable and valuable financial products and services, delivered in a sustainable way. As a financial inclusion product, premium financing allows more people to purchase insurance and to become part of the financial ecosystem. If there was just one key takeaway that the CEO of PremFina, Bundeep Singh Rangar (pictured), would like readers to take away from his recent whitepaper on the benefits that premium financing can offer insurance brokers it would be the realisation that this service can help make the purchase of insurance premiums significantly easier and more attractive, and not painful for the end customer.
The nature of premium financing has the trigger effect of more insurance being sold overall, Rangar noted, which benefits every single participant in the value chain. The business or person buying insurance has more cash at their disposal as they are not paying the full sum upfront, which allows them to buy other insurance products and be covered against more risks. The associated brokers and MGAs are selling more insurance products, thus making more commission. Meanwhile, insurance underwriters are receiving more insurance premiums.
Top three reasons why brokers should use premium financing
There are a large number of advantages for insurance brokers when it comes to familiarising themselves with premium financing, Rangar said, and he outlined a few key factors that make this option a viable one for these insurance businesses.
- Brokers will make more money in addition to their traditional income stream as they will make a portion of the finance charge. When an end customer is paying by instalments they pay an additional finance charge and a percentage of this goes to the broker involved. Rangar noted that: “The FCA itself said in 2015 that brokers can add as much as 5% to their top-line.”
- “Reason number two is that [premium financing] is an easy sell,” he said. “Brokers do not have to create a new dialogue with a customer for a new product. When they’re selling insurance premiums, this is just one more thread of the same conversation and a simple question: ‘would you like to pay by monthly instalments?’ And, if so, they simply tag that on to their existing sale.”
- Larger brokers can also make interest income instead of making a share of the finance charge if they become a funder themselves. This means they can lend using their own funds as PremFina allows the broker to rent out their white-label loan administration software, therefore, becoming a premium finance company. Fundamentally, premium financing is better for cash flow and better for cash balance and these two factors are more relevant than ever right now due to the COVID-19 pandemic.
“The pandemic has affected businesses and their cash balances and cash flow. So, we’re seeing a surge in demand from end customers, asking their brokers if they can pay by instalments that has not happened to the same degree before,” he said. “And one of the benefits of a third party payment financing company is that it is an agnostic provider. We’re not linked to a specific underwriter so the broker can just choose the best insurance coverage and then add a financing option to it.”
This positive also holds true for the individual consumer, he noted, who avails of an agnostic provider who does not have access to their personal lines of credit or their credit cards, which allows them to use those options for alternative purchases, whether that’s a Gucci bag or groceries. Customers can also manage this against their cash flow which is more important than ever as people may find themselves laid off, making the cost of an upfront insurance payment increasingly painful.
Looking to the long-term implications of the pandemic, Rangar can see that this crisis has encouraged many who may not have previously considered digital innovations or ways of doing business to embrace the opportunities thrust upon them by the crisis.
“I think in some ways brokers, like many, are creatures of habit and that habit cycle is being broken right now,” he said. “Because normally they would have a customer renewing their insurance premium and, in a normal economic environment, that customer would just renew it. But now they know there’s financial uncertainty about the future and there’s nervousness among their customers.
“So, [brokers] are more proactive about offering instalment plans. And there are more requests from customers asking about these options. So, an unintended consequence of the pandemic is a greater proposition for the financial inclusion model which otherwise might have been a bit of an afterthought. Now it’s a forethought.”
Discover all 10 of the top reasons why insurance brokers should embrace premium financing in this whitepaper by Bundeep Singh Rangar now.