Beginner’s Guide to Premium Finance

Premiums have been on the rise over the past year, and insureds are struggling to purchase the coverage they need.

For brokers, explaining those premium increases to their clients is one way to set themselves apart from the competition. For Jim Miller, chief sales and marketing officer of First Insurance Funding, premium finance is one solution that can help address increasing complexities.

Premium financing can come with several key advantages for insureds, according to Miller, first among them being cash flow. By choosing to pay premiums through this kind of loan, he explained, insureds can “preserve capital for other priorities,” as they will not have to pay the whole premium up front but in installments over the loan term. Additionally, Miller added that choosing this route allows insureds to “consolidate their premiums into one payment,” and can even allow them to “purchase additional or better coverage” by reducing the up-front financial burden for a company.

Even in the midst of aggressive rate hikes by the Federal Reserve, intended to curb inflation, premium financing can set itself apart. “Rate hikes will extend to premium finance loans,” said Miller, “but will still typically be lower rates than offered by an insured’s bank.”

Another key advantage is in the loan terms. “Rate and payments won’t increase over the loan term,” Miller explained, and highlighted that the process is typically “faster than bank financing.” The collateral for a premium finance loan also differs in a crucial way from collateral for a traditional bank loan—as Miller put it, the collateral is often the insurance coverage itself, rather than an asset of value held by the company.

Premium financing can also be advantageous for brokers. In this day and age, when finding a way to differentiate from the competition is becoming ever more important for brokers, premium financing can be one of those differentiators, in Miller’s view. According to him, “offering payment options insureds will value and have come to expect” will make brokers stand out for their clients, as it demonstrates an awareness of a client’s financial needs, and shows the broker wants to work with them on finding the best way to secure the coverage they both want and need.

But Miller cautioned that there are some important things to be aware of when brokers are considering integrating premium finance offerings into their business. Brokers ought to above all ensure their premium finance provider has “strong financial backing” and “strict compliance and risk management procedures,” especially in the realm of data security, he said.

Besides that, Miller suggested brokers should look for a premium finance provider that has “technology that is always being reviewed and improved to meet the growing expectations for an Amazon user experience,” and offers “financial solutions that agencies can leverage that go beyond a premium payment solution like lending for their agency and financial expertise for their niche clients.”