Financial Tools for an Uncertain Economy

Being a bank-owned premium financing company means that the economic environment, especially changes in banking, is a major factor in the business landscape, says Ben Rubin, chief risk officer for FIRST Insurance Funding & Wintrust Life Finance.

In this podcast, sponsored by First Insurance Funding, Rubin discusses the particulars of the current financial services environment and how brokers can position premium financing in their conversations with clients. He also explains the different options it provides, how different sized companies might use premium financing in different ways, and more.

Ben Rubin: There’s inflation, you know, sort of everywhere, right? It’s starting to come down. But coming down just means it’s getting to a more normal level. And we’re still all adjusting to changes over the last several years. I’d note to the insurance brokers, you know, this is like selling any other insurance product.

You have to know it. You have to understand it.

Sandy Laycox: Welcome to the Leaders Edge podcast. I’m Sandy Laycox, editor in chief of Leaders Edge. In this podcast sponsored by First Insurance Funding, I talk with Ben Rubin, chief risk officer for First Insurance Funding and Wind Trust Life Finance. Being a bank owned premium financing company means that the economic environment, especially changes in banking, is a major factor in the business landscape. Ben discusses the particulars of the financial services environment and how it affects his business.

Ben Rubin: It’s important to think of premium financing as part of the financial industry, right? It’s not a standalone part of the financial industry, it’s reliant on funding, right. And so funding can come in a bunch of different forms, whether it’s through commercial paper, some of the competitors in the premium finance space use securitizations, which are funded off of commercial paper. Others are bank owned as is first insurance funding, and we are funded essentially with deposits. Right?

And so when you think about, how the economy is changing and where interest rates are going, that has a direct impact on premium financing as an industry. Additionally, you know, there’s the opportunity for companies, borrowers to to do other things with their funds. Right? And, you know, part of the reasons they might wanna use premium financing is to use those funds for other things, whether it’s investing, earning interest, on their deposits, or maybe they have commitments to their current banks to keep a certain level of deposits. All of those things come into play.

So, you know, the the changing interest rate environment, some changes to just banking in general where deposits are becoming scarcer, and you think back to the the bank crisis use of of early 2023, but a lot more scrutiny from regulators on how banks are managing their deposits. And, again, that higher interest rate environment is is, bringing people to to do other things with their funds and to invest them in different ways, and that’s taking some of the checking account and free deposits that the banks had, out of the system a bit. Right? And so, when you think of all of that, it’s just it’s a changing landscape and financial services in general, and premium financing is definitely part of that. It’s interesting because it’s not dissimilar from the changes taking place in the insurance industry, in terms of of policy premiums and where things have gone, in that space.

You know, there’s inflation, you know, sort of everywhere. Right? It’s it’s starting to come down, but coming down just means it’s getting to a more normal level, and we’re still all, adjusting to, you know, sort of the changes over the last several years. So it’s not dissimilar from talking about changes to insurance premium rates. I mean, one of the the benefits of using premium financing, particularly, as insurance premiums are going up, is it helps customers manage their cash flows.

Right? And where all of their expenses, whether it’s salaries or, insurance or rent or, travel and entertainment, whatever it may be, all of those expenses have gone up. And, there’s usually a lag in in growing your revenues. You can’t grow your revenues as fast sometimes as your expenses go up. And so they they get pinched a little bit.

Right? And premium financing can help them retain the same levels of insurance coverage that they’ve had even though the cost has gone up by spreading out the the payments. Right? It’s not as big a cash burden at one time, because that’s a big piece that that, borrowers, that that operating companies have to work through is is just, you know, they see that higher premium bill, and do they wanna pull back their coverage, right, and reduce the the coverage levels so that they it becomes more affordable on a risk per premium, a risk premium per dollar, perspective. But, you know, premium financing can help them work through that and and help them get a little bit more coverage or retain the same levels of coverage and and manage their cash flows appropriately.

So that’s one of the things that the brokers will think about is if they talk through this with clients is is really just what what are they trying to accomplish with the premium financing? It can it can do a number of different things. You know, premium financing can help a customer, just put a liability with the asset that’s being financed. Right? You don’t use your line of credit to buy a car.

You take a car loan and match that to the to the expected life of the vehicle. Right? In this case, you’re taking a very short term loan typically for premium finance loans on a 12 month policy, and you’re not using your borrowing capacity that you have with your bank or your line of credit or against your other assets. You’re doing it specifically against the asset you’re financing, which is the insurance policy. So it just sort of lines things up.

Right? And that can it can be a benefit to to customers who just want that, to match the the asset, right, from a financial standpoint.

Sandy Laycox: Mhmm. Have you guys seen a lot of increase in that as we’ve watched sort of property premiums go up, up, up over the past few years?

Ben Rubin: We have. And it’s and it’s not just the mom and pop, I’ll say, smaller businesses. We’ve seen it on, you know, 7 figure premium accounts. Right? It’s it’s larger property customers.

It’s some of, you know, more public companies are using premium financing.

Sandy Laycox: Oh, I see.

Ben Rubin: In part because when you think of the APR, you know, the annual percentage rate, that applies to premium finance loan, while it might be a higher percent, the loans amortized so quickly. Right? It’s a a 10 month or 9 or 10 month, you know, loan typically. So even though it it might be a higher rate, the actual amount of interest you pay is not that full amount because the full balance isn’t outstanding for 12 months. You know, it’s the average duration is only 4 and a half months.

So it’s more important, you know, when you’re looking at these with clients to help them understand, look at the actual dollars, you know, as opposed to the rates because, you know, again, the the loans amortized so quickly that the actual dollars aren’t as significant as as the interest rate might look like to to a customer. So, helps them to put it in perspective as they’re managing their their balances and cash flow, and particularly if it’s allowing them to get those higher levels of coverage or retain those higher levels of coverage. And again, it doesn’t impede their ability to use their other assets, whether it’s, you know, real estate or or, you know, their hard assets or their equipment to get regular, more traditional bank financing. Right? Because, you know, this is a very specific asset that’s that’s pledged.

Mhmm. And a lot of borrowers like it because, you know, there’s no UCC filing. There’s nothing out there to let the world know you financed your insurance versus a more traditional bank loan. You know, those things show up. And if somebody’s looking at your company, it’s more obvious.

Sandy Laycox: Ben goes on to share how brokers can position premium financing in the current environment, considering the benefits to using it, the different options it provides, and how different sized companies might use premium financing in different ways.

Ben Rubin: The biggest benefit to the broker is really, you know, this is a sizable in terms of premium financing. And to make the assumption that you know, you know, that your client wants it or not, isn’t always a great assumption. And so if you’re if you think about it, you’re going there and you’re providing your knowledge and your your expertise and and sort of managing risk within a company, and really, you know, around financial risks, etcetera. And and you’re talking about, you know, the right levels of coverage and and the cost associated with those, and you’re giving them, you know, a nice quote on a number of policies, typically. Now if the next broker comes in that’s been trying to take your account or you’re both bidding on the same account and and they’re equally as knowledgeable as you are, have a great relationship, have been calling on this customer the same amount of time you have trying to get the business, and they offer the similar coverages, and similar costs, but they offer the premium payment plan with a premium finance agreement and you haven’t.

That’s one more thing that they brought to that customer as an option. Whether the customer wants it or not, they might just be viewed as somebody who’s, you know, just got one more arrow in their, in their basket than you’ve got. Right? And so in their quiver. So, you know, it it’s one of those things of there’s no risk in offering it, not knowing what the borrower’s or the insurance financial condition is or what the other use of those funds may be for them in their business.

Maybe they’re thinking about adding another client, but it’s gonna stretch their working capital. Right? And and, you know, by just giving them this option, you might free up that opportunity for them. Or maybe that’s buying the next piece of equipment and, you know, they may have thought, well, I I gotta pay my insurance now. I’m gonna wait 6 months, and that could slow the ramp up of their of their business.

So some of those things that if you’re just not aware by not offering it, you sort of have have shot yourself in the foot a little bit. So that’s the biggest thing, you know, from my perspective is just, you know, why would you not offer something, that’s readily available that most people in the industry would offer, at the risk of of, you know, losing business to somebody else. Right. So that’s one. You know, just in terms of how they might brokers should be talking about it with clients, it’s really just about that, you know, opportunity cost of using working capital for other parts of their business.

You know, if you’ve got multiple, carriers that are offering different policies, you know, how do they manage their accounts payable? Is it very cumbersome for them to be issuing multiple checks, to different markets, you know, on a regular basis? Or maybe some wanna be paid upfront, some wanna be paid quarterly, some want monthly. All of those things come into play, and it just, you know, all it’s a lot of times easier just to consolidate it into that one payment, which is, premium financing can do. So, you know, a number of different reasons to sort of think about, why you might wanna do this.

Sandy Laycox: Mhmm.

Ben Rubin: Yeah. There’s even there’s aspects of premium financing that some brokers aren’t aren’t aware of, which is the, you know, the ability to even, you know, in a workers’ comp type, auditable policy, to be able to work with third parties that will help track, payroll, for the customers and sort of you can have sort of adjustable premiums within a premium finance contract so that we can sort of stay ahead of that audit, issue that can come up at the end of workers’ comp. So so a more limited number of our borrowers’ insureds, you know, sort of use that, because it does take a little extra work, on the customer side. But, it’s a great way for particularly smaller companies that that have, you know, audit risk, right, on those worker comp policies where payrolls are changing or the class of patient workers may change to help them manage that. So there’s not a big, check to do at the end of the policy here.

It it can be very helpful to the broker relationship as well as to the interim.

Sandy Laycox: As chief risk officer, Ben shares his thoughts on regulatory risk as well as which industries are worth noting from a risk perspective. And he has some final thoughts for brokers considering adding a premium finance option to their offerings.

Ben Rubin: Well, you know, there’s a few things we think about within premium financing from a risk perspective. 1 is obviously our regulatory risk and and, you know, whether it’s the the various states department of insurance. You know, but, you know, from a aside from the regulatory risk aspect of it, you know, the things that we look at within our portfolio are really just how much risk we’re taking in terms of of credit terms that we’re offering, what we’re seeing in terms of trends of industries that we finance. You know, if you look out there in the market, across, insurance, you know, transportation has been a challenge over the last couple of years is there’s been a big supply demand, transition there, post COVID. So we’ve seen that come through our portfolio and and obviously work with our customers, with our agents, with with the insurance to make sure that we still support that industry with premium financing, but do it in a way that limits everybody’s risk.

Okay. And then certainly, there’s, you know, just based on the claim activity within transportation. Right? There’s been, changing approaches from their, various insurance carriers in terms of of minimum earned provisions or loss sensitive premiums. And right?

And we have to understand all of that risk, because the the insurance premiums are our collateral. Right? If somebody, doesn’t pay their premium finance bill, you know, the sole piece of collateral that the premium finance company has is is the policy. Right? And so understanding those premium earning provisions is is really critical to us.

We’ve spent a lot of time looking at some specific carriers that, have done things a little differently than the rest of the industry, and we need to understand that and and make sure the agents that we work with understand that as well because it affects the terms that we can provide, in order to manage our risk appropriately. So, you know, in in terms of that so we’re always looking at just sort of that industry risk and sort of what’s going on and and making sure that we’re able to continue to serve industries, and to continue to serve clients. I mean, our goal is is at Wintrust in general, but specifically in premium financing is to never jerk the wheel. You know, we wanna be able to gradually change in line with the environment and to continue to serve, customers, across the spectrum and never be the ones that have to say, uh-oh. We’re too far off course, and we need to to, you know, make a hard right.

You know, we if we’re doing things correctly, you’re never you’re never doing anything that’s terribly unexpected. You’re just moving the needle a little bit to get things back and forth.

Sandy Laycox: Mhmm. Any other industries besides transportation that you have had to pay particular attention to recently?

Ben Rubin: You know, that’s been the one that’s that’s probably been the most, challenging over the last couple years. You know, the other is, you know, there’s there’s always pockets. You know, we’re we’re a national company. You know, we’re we’re doing things all over the US and in in US territories. You know, we do have a a sister entity up in Canada as well.

And so, you know, there’s always different regional issues, whether it’s emergency orders related to, weather activity, buyers, things of that nature that can impact, you know, the ability to cancel policies or, you know, certainly has has impacts on changes to the insurance carrier’s financials, and that’s something that we look very closely at where we’re seeing carrier struggle, because we do have to look at them as as, you know, sort of the ultimate backstop on these these loans. If the insured fails to pay, we’re reliant on that insurance carrier to to be able to return premiums to us. And if they become insolvent, that becomes a challenge, particularly in the E and S market where where they’re not, backed up by state guaranteed funds. So, you know, we’re attentive to all of that, you know, sort of nationally and even internationally into Canada. And, no specific industries, just sort of those geographic issues.

I mean, COVID was a challenge as it was for for everybody, but particularly, in insurance where, you know, you you really weren’t sure at the outset how customers, borrowers were gonna, perform, until, you know, sort of PPP came out, and you had, emergency orders being issued all over the place by various states. So, you know, it it impacted our collateral. So there was there were a few months there where we were very concerned, but, you know, as was everybody else around a number of things. So so, and then, you know, we have the benefit too of of, you know, we’re a national bank. We’re talking to our regulators, which are, you know, part of the OCC, the Office of Control Currency Comptroller of Currency, and they’re part of the Treasury Department.

Right? So you’re getting some insight from them as to what they’re seeing across the, regulatory landscape and what they’re seeing at other financial institutions and hearing sort of what treasury might be doing to to assist the economy. So you get a little bit of that, and we were, you know, during COVID, having regular regular conversations with them, as we’re all banks. So, you know, it’s helpful. It’s always good to have good relationships with regulators that can help you, understand what’s going on in in from their perspective.

One thing I I’d I’d note to to the insurance brokers, you know, this is like selling any other, I’ll say insurance product. You have to know it. You have to understand it. You have to know what your obligations are as part of the the arrangement. Right?

I mean, similar to, you know, risk that you have on placing policies and making sure that you’ve got the right coverage in place and that you understand the and have explained to the customer what the, you know, what the exclusions and the policies are, etcetera. I mean, one of the things brokers need to make sure they’re they’re doing when they’re working with premium finance companies is disclosing those policy terms to the premium finance company as well. Whether it’s minimum earned provisions, extended days of cancellation, things of those nature that impact how a policy can return premiums, you know, pro rata versus short rate. Those are are key pieces that need to be input correctly into, you know, the premium finance agreement, and the agents and brokers sign those premium finance agreements representing and warranting to a premium finance company that all of the information is a premium finance company that all of the information is correct. Right?

So, you don’t wanna create exposure for your agency by, you know, not paying attention to those details. And and it’s also you can put your insured in a bad place if the collateral performs differently and they decide to cancel coverage and replace it, you know, with another carrier, and now they’ve got a shortage on a premium finance loan because some of those terms weren’t disclosed correctly, and terms weren’t appropriate for the types of policies the way that they earned. Right? So it’s just something to be cognizant of, and and, you know, it’s sort of, you know, also similar to to when you’re placing an insurance policy. You’re you know, the broker earns a commission.

Right? Because they have this fiduciary duty. They’re they’re, they’re in their selling and understanding the client’s needs and and making sure that you’re getting the right types of policies. Similarly, there’s the opportunity to earn, you know, income in most states, for, you know, providing the premium financing, to clients, a similar sort of commission type structures and things like that. So, you know, there is that opportunity to earn income.

Right? And so why wouldn’t you, you know, want another product in in your arsenal that you can offer as another added, you know, piece of of revenue for your business.

Sandy Laycox: That was Ben Rubin, chief risk officer for First Insurance Funding and Wind Trust Life Finance. I hope you enjoyed our conversation. For more Leaders Edge podcasts, go to leadersedge.com.