Earlier this year, the Financial Conduct Authority (FCA) announced a market study aimed at understanding whether premium financing represents fair value for motor and home insurance buyers. Reaction to the news varied across the market, with some highlighting that the study was launched in recognition that premium finance is an ‘essential’ product for many consumers, while others said the review should include a consideration of whether the sector is needed at all.
So, why is the regulator looking into premium financing, what is the scope of the investigation, and what will it mean for brokers? These were some of the questions asked during a recent panel on ‘The Future of Premium Finance’, hosted by Chris Rees, head of premium finance at Render, a credit technology provider which recently launched on to the premium finance scene.
Digging into what the market study means in the context of the launch of the government’s broader motor insurance taskforce, David Sparkes, regulation director at BIBA, said the market review may help lay bare the economic implications of any changes to the broker. He noted that there are two types of premium finance agreements that brokers have with lenders – recourse where the broker takes on the credit risk and the bad debt, or non-recourse.
“There is a lot on recourse where the broker is responsible for the debt,” he said. “So, the lender gets the money, the insurance company offsets by cancelling the policy so they’ve got no issue, and it’s all with the broker. From the information we’ve had, about 80% of the bad debt from defaulting on finance is not recovered. So, how can brokers cover that? There has got to be some rating, or commission if you like, to actually compensate for running that risk. The FCA thinks it’s a low credit risk but actually, for brokers, it’s not a low credit risk.”
Roger Brown, managing director of TIFCO, emphasised that while this is one part of the justification for the commission that brokers charge, there are other considerations at play. “You’re going to take more calls, you’re going to do more servicing, you’re going to help the customer downstream,” he said. “All of the lenders provide portals and APIs and ways to help the customers service and self-service, but they have to build that technology.
“So, the idea that this is somehow cost-free to the brokers is just a bit of a myth. If you want to invest in business, you want to make a return on it. I think that goes doubly when you look at the insurer models. The insurers are operating to CORs. If you wait longer for your money, where's your investment income? You're taking 12 collections, not one collection. How are you going to pay for your marketing costs or your aggregator fees that are due upfront if you're collecting the money on the drip?”
It's not a well-reasoned argument to say that the sector can simply click its fingers and everybody can move to a monthly cash flow, he said, not when you consider some of the costs involved and that some of the investments made are annual or even multi-year. In order for such a change to work, it needs a really well-thought through investment model and justification model. And to do that, you need to have the right people, skills and knowledge.
Responding to this, James Daley, managing director of the consumer group Fairer Finance – who responded to the FCA’s announcement of a market study as an “encouraging” sign but noted that the option only exists as most insurers insist that consumers pay for their annual insurance upfront – said that while Brown is correct, it’s “not impossible” to move to that world.
There will be implications, he said, and yes, those costs do have to be covered in some way, and that has to be passed on, probably, to the customer ultimately. However, putting that aside and saying that premium finance lives on, ultimately brokers do have to be able to justify the levels of commissions that they’re taking. It’s mostly based on percentages but is it much harder work to organise a larger premium? Potentially, but maybe not – and it’s brokers who have to make that case.
“At the moment, the cost just goes up in pounds and pence for people with larger premiums, who are generally, arguably, the most vulnerable customers, and they're the ones who are most profitable for a lot of brokers,” he said. “So, you've got to put yourself in a better position there, where you can justify the relationship between the work you're doing and the service you're offering.
“I hear all these arguments rolled out all the time, but I've not actually seen any hard evidence that really kind of shows, ‘well, this is how much money we're making, and this is where it's going’. That's where I think the industry has missed a bit of an opportunity to get ahead of this, and now it's on the back foot, fighting extinction.”
