Forming a captive premium finance operation

Rough Notes, Jul 1999 by Farfaras, Chris

Whether the financing operation is outsourced or operated in the agency, it can boost income significantly

As agents cope with this prolonged soft market they have an opportunity to add significantly to their income stream by establishing a premium finance company. Many agencies have been slow to take this step for fear it will be too difficult or time consuming. Those fears can be overcome with the help of outside experts in setting up a premium finance operation. An agency can expect to earn a return of 25% to 40% on its investment in premium financing, year-in and yearout with little risk.

A good rule of thumb is if an agency finances premium of at least $1 million per year, it should seriously consider establishing its own premium finance operation.

How can premium financing work to the agent's advantage? If a policy is direct billed, the agency will earn its commission over the billing cycle or as the insured pays. If the premium is billed by the agency, however, and the premium is financed, the agency will earn its entire commission up front. By choosing premium financing over direct bill, the agency gains greater control over its cash flow management.

Premium finance companies exist in a variety of forms. Some are bankowned, some are independent, and some carrier-owned. When an insured arranges for premium financing, he/she submits some kind of a down payment (20% to 25% in most cases) and the remainder is financed over 9 or 10 months. Once the insured signs the finance agreement, he/she is giving the finance company power-ofattorney to handle the billing.

The finance company then forwards the balance of the premium to the insurance company and begins billing the insured in monthly installments with an interest charge added in. If the insured fails to pay the installment, the finance company then has the right to request cancellation.

Some agents feel they do not have enough time and resources to get involved in premium financing. To get past this hurdle, they can partner with a firm that specializes in providing agents with outsourced administration services for an agency's in-house premium finance company. Input 1, LLC, based in Woodland Hills, California, specializes in such outsourcing. Input 1 provides full back-office loan administration, software, Internet account viewing services and consulting to more than 80 premium finance companies in three countries.

According to Todd Greenbaum, CEO and president of Input 1, "With a captive finance company, agency personnel process financed premiums just as they do with outside finance companies. Agency principals do not need to train their staff, nor do they have to manage the day-to-day operations. In short, by outsourcing the back-office, the agency does not bear the burden of running a premium finance company. What the agency does get are the earnings generated by this new profit center. Although we work behind the scenes, we make sure that the agency principals understand what we do for them so that they have confidence in us and can concentrate on their insurance sales."

Some agencies prefer to take premium financing to the next level and handle the administration themselves. In these cases, firms such as Input 1 offer software that can perform front-end quoting and backoffice administration for captive premium finance companies.

As for the staff resources that must be committed when an agency implements the software program, consider this: An agency that finances 100 contracts a month would be handling an average of five per day. A staff member can quote, enter and process a loan in as little as 10 minutes, which comes out to less than an hour per day.

Although an agency that sets up a captive premium finance company can expect an annual return on investment in the 25% to 40% range, its annual return may be much higher. The return is influenced by factors such as the size of premiums, number of cancellations, down payments and the interest rates charged.

"Owning our own premium finance company has afforded us many benefits, both at the retail and wholesale level," says Richard J. Acunto, CEO of Survival Insurance Brokerage, Guardian General Insurance Services and Infinity Acceptance Corporation, based in Los Angeles. "The capture of an additional revenue source which is traditionally lost has enhanced our bottom line substantially. Our decision to utilize Input 1 to handle all our back-office processing for premium finance allows us the opportunity to remain focused on our core business activity, while at the same time increasing margin. Input l's technology, products and customer service have far exceeded our original expectations."

Where to start

When an agency wants to establish a premium finance operation, it should seek out a firm that can provide the full spectrum of opportunities-either outsourcing or a software solution. The firm will initially help the agency establish a corporation, apply for a license and handle all legal work necessary in the agent's state. The entire process can take as little as four weeks but averages from eight to ten weeks depending on the state where the agency is located.