Serving Insureds and Insurers with Premium Financing

For property and casualty premiums, the loan process is typically straightforward. The loan is arranged through the insurance broker after getting quotes from the carriers and talking to the insured about insured values, coverage, premiums, and deductibles. When the insured opts for a loan, it’s time for the agent to collect premiums, which brokers dislike. Who likes to ask their clients for money? It’s much easier if the broker offers a payment plan.

The insured benefits from payment installments that improve their cash flow. It helps the carrier get all their funds up front, so they can invest it. And because the premium finance company pays the carrier upfront, the broker receives their commission upfront. Everybody benefits from the transaction—brokers should really offer it with every policy quote: otherwise, someone else will. If the same policy is quoted by two different brokers, and one broker offers a payment plan and one doesn’t, most insureds would select the agent offering more options even if they don’t opt to finance.

For life insurance premium finance, the loan is not about spreading out cash flow. Clients are predominantly high-net-worth individuals buying insurance policies with large death benefits and investing in the policies at the same time. Term life insurance policies cannot be premium financed. You pay a premium; it’s fully earned by the carrier. There’s no residual value in the policy unless you die. We finance loans supported by the cash surrender value of the policy, so a whole life policy, a universal life policy, or the types of life policies that have redeemable value.

For a life insurance policy with a $10 million death benefit, the broker might come up with a strategy with a required contribution of a million dollars a year for five years. In the first year, when you pay the million-dollar premium, maybe only $250,000 of it is paying for the $10 million death benefit and the rest becomes available as cash surrender value within the policy. Why would you pay a million dollars for something when you could pay $250,000? That $750,000 difference is now invested within this insurance policy on a tax-deferred basis—like a 401(k).

Now our high-net-worth client needs to pay the premium. They don’t have all the cash available, but they have substantial equity in real estate. Should they borrow against one of their properties, or does it make more financial sense to take a premium finance loan for $1 million?

The $1 million policy provides $750,000 of collateral. The client gets a letter of credit or maybe they have an investment account to pledge as additional collateral. We’ll finance that policy for a 6% rate and pay the premium (rates are typically variable and based on current market conditions). They can invest that $750,000 within the insurance policy in an S&P 500 index strategy with a 10% annualized return over a 10-year horizon. They earn the 4% spread between the investment return and the interest rate. It’s a more sophisticated purchase and a smart investment strategy but has tax and estate implications. The sales process the insurance broker embarks on typically involves the insureds seeking guidance from accountants, attorneys, etc.

We estimate that 15%–20% of commercial clients take advantage of premium financing—whether they want to improve their cash flow or they want to use that cash for other priorities or investments.

Businesses typically want to align debt with the asset being financed. Premium financing is the best way to do this for an insurance policy. Using a line of credit takes away your ability to use that line of credit for other investments in your business. Why would you tie that up?

Outside of the excess and surplus (E&S) lines market, more of the admitted carriers will offer payment plans. E&S lines typically are more bespoke and complex policies. As a balance sheet company, carriers often have less investment in service infrastructure as dealing with monthly payments, and quarterly payments are a nuisance. That said, an insured could have several admitted market policies with different payment options. Many brokers use a premium finance installment plan to streamline the premium collection and give the insured the simplicity of a single monthly payment covering multiple policies.

We’re essentially an outsourced servicing platform for [carriers] because we collect these monthly payment streams and give them the cash. If an insured doesn’t pay, the policy gets canceled and the return premium goes to us, with FIRST handling all the administrative work. E&S lines tend to be where carriers haven’t built that type of infrastructure to administer their own payment plans.

Brokers use sophisticated agency management software (AMS) platforms. If you, as a premium finance company, don’t have a good way to integrate with those software programs, you’re making more work for your clients. They must enter all that data into their AMS, and then you’re making duplicate entries into your premium finance loan software, and that leaves room for errors. You’re making the whole process more cumbersome.

We have always been a leader with our technology platform—even before “insurtech” became a buzzword. Many years ago, we developed integrations with multiple AMS platforms. Now you click a “generate premium finance agreement (PFA)” button. We have preapproved programs, so agency clients just hit that button, get their premium finance quote to present to their customer— no need to talk to us. If the customer or the broker says, “I don’t want to use the preapproved program, I want to do something else,” they still hit that button, generate the PFA, then just call or email us and say, “Can you change these terms?” Flexibility is a key feature of our service philosophy.

We were one of the first to create the ability to present the premium finance quote to the client electronically. Not only can the agent generate the agreement by hitting a button, but the agreement is sent by email to collect signatures electronically. FIRST collects the policy down payment from the borrower/insured, saving the agent the time and hassle, and sends it to the carrier. We fund the net premiums to the carrier and send the agent their commission. We created an entirely electronic and streamlined loan process.

Customers want efficiency and convenient payment options at the point of sale, so we will continue to develop innovative solutions that simplify the process and provide a great user experience. As technology continues to drive our strategy, we will continue to educate agents on the role premium finance plays, why it’s a service to their customers, and why it’s a benefit for their agencies.

Similarly, on the life side, it’s a high-touch service business for high-net-worth individuals. We will continue building strong connections.

Part of what differentiates us is we’ve been doing this for longer than anybody and have been a consistent partner to our broker & carrier relationships. There are other banks out there that do it, but not as a specialty. They do it as part of a private client banking group. We do it as a standalone business that is a leader in the space, and our expertise is unmatched.

We have relationships with the carriers and brokers, we have approved documents for premium financing with carriers. We can act quickly and service clients in a way that others don’t. We have experts who live and breathe insurance policies all day long. You must understand how policies perform on the life side to give good service to the broker and the client. If something occurs that you didn’t understand when the loan was initiated, then two or three years down the road you’re going to have a problem. We understand how those policies function, the costs involved, how they credit, and what the tax rules are with the different policy types.

At the end of the day, you must have a core group of people who understand the business and provide a high level of service. Even on the P&C side, where we book thousands of loans a day, people still call with questions. We operate with the same end goal as our clients: they want to do things as efficiently as possible, but they also want to provide service to their customers that’s better than the competition.

Our focus and approach in premium financing remain to have the best technology and the best people and resources available.