Breaking down the premium payments
With a large percentage of customers wanting to pay for their insurance premiums in monthly instalments, it is no wonder premium finance has become such a large industry, as The Journal discovers
As with all other sectors, Brexit is set to force change in the payment world. New research from Saxo Payments reveals more than a third of businesses surveyed said they are considering moving operations currently in the UK, before the country’s exit. More than half said they plan to change financial partners in the run-up to Brexit. While this might be the view of those involved in cross-border financial transactions, at the other end of the scale the relationship between insurer, broker and insured can also often hinge on the financial arrangements.
Premium finance has long enabled insureds to take a more staggered approach to the payment of premiums. Back in 2015, a Financial Conduct Authority (FCA) review revealed that insurers and insurance intermediaries are not always providing customers with clear information about the different payment options available, when buying general insurance products.
The FCA thematic review of premium finance focused on the online sale of home and car insurance. It found that, in some cases, people may not realise there is a price difference between
If a firm is providing regulated credit or is acting as a credit broker, they are required to provide a representative example setting out the interest rate, any fees or charges, a representative annual percentage rate (APR) and the total amount payable.
However, FCA researchers found a number of cases where this was either not provided or the example did not include all of the required information.
The FCA review also identified a wide range of APRs, highlighting the importance to customers of having appropriate information to be able to compare pricing and understand the impact that the cost of finance has on the overall cost of an insurance product. The FCA also found:
- An adequate explanation of a proposed credit agreement was not always provided sufficiently early in the customer journey to enable customers to make informed decisions;
- Firms acting as a credit broker did not always disclose the name of the credit provider or details of their relationship with the firm;
- In some cases, it was not made clear that a fee would be charged. However, it is not just the premium finance providers that benefit.
WHAT IS PREMIUM FINANCE?
Premium finance, like payment in full and payment by credit or debit card, is just another option a customer has to cover the cost of their insurance policy. Premium finance spreads the cost of the insurance premium, bringing an additional set of benefits to the customer, broker and insurer.
Customers that choose this option are then able to avoid payment in full upfront and instead spread the cost of their premium into regular repayments.
This facility is not free however – there is an additional fee for use of the service and rates do vary. Yet, the benefit that spreading payments can give to customers’ cashflow means it is often a valid option for many.
The process is usually quite simple. Once the policy is agreed and the customer is presented with the ‘bill’ for their insurance, the premium finance provider checks their details and status and if accepted, approves their finance request. A credit agreement is then signed by the customer and the provider pays the insurer or broker the full cost of the premium upfront. This then leaves the customer to repay the original amount (plus interest) back to the provider in regular repayments by direct debit.
Brokers and insurers also gain from the third-party relationship, according to one of the country’s largest providers, Premium Credit.
It explains: “As well as increasing customer choice without additional admin, they receive a percentage commission for every new credit agreement they set up. As such, premium finance is viewed as an additional profit source; a second income stream with commission on each finance approval and often a way to improve client retention.”
And it is not just about outsourcing the service, as some larger brokers and insurers choose to offer premium financing services themselves. However, Premium Credit notes: “Yet for most, the risks in ensuring access to funds, meeting consumer credit regulations and retrieving unpaid debt outweighs any benefits perceived in providing the payment method internally.”
PREMIUM FINANCE CUSTOMER JOURNEY
- The broker/insurer secures an insurance policy for the customer
- The customer is presented with the insurance premium bill
- The broker/insurer offers their payment options to the customer, including premium finance and the ability to spread the cost
- If the customer chooses premium finance the insurer/broker receives commission on the sale
- The premium finance provider pays the broker/insurer the full cost of the premium
- The customer repays the full cost of the premium + additional fees via regular direct debit repayments to the finance provider
Historically, completing premium finance proposals and credit agreements within the insurance broker market would be a 100% paper process. However, new technologies and a customer-driven expectation for a seamless digital journey are powering the evolution of the industry as a whole.
Email and SMS messaging are beginning to replace standard letter communications and an understanding of the importance of supporting customers as they move between channels is developing.
New innovations include e-signatures on credit agreements, processing of online payments through a mobile or tablet device, as well as having the ability to access their credit agreement documents electronically.
For example, Premium Credit has launched an online point of payment portal – Electronic Payments for Insurance Customers and Clients (EPICC) – integrated into the brokers’ underlying customer journey.
The company claims the system eliminates the need for brokers to ‘sell’ finance, as a finance option is offered during every transaction. Once the payment method is decided on, brokers enter their client’s preferred payment method into EPICC and the transaction is undertaken. Premium Credit says that, following the FCA guidance from 2015, “EPICC ensures a consistent and compliant online journey for clients when paying by finance”.
It also claims that during pilot testing, it led to a 10% increase in brokers’ premium finance penetration, from 27% pre-pilot to 37% post-adoption of EPICC.
Mark Dearnley, chief information officer at Premium Credit, comments: “As with many businesses, legacy technology infrastructure represents a key challenge. Our goal is to continuously improve efficiency. We’re looking to the future.”
FACTS AND FIGURES
Datamonitor estimates 40.6% of customers buying motor insurance and 52.5% of customers buying household insurance in the UK opt to pay for annual insurance contracts in monthly instalments, according to the FCA. The premium finance industry is large, estimated to be worth £6.1bn in the UK. In 2016 for example, Premium Credit financed more than 2.4 million customers and processed more than 30 million direct debits. Close Brothers Premium Finance works with more than 2,000 brokers.
Why use premium finance?
Types of insurance premiums that can be paid via premium financing include car, public liability and fleet insurance. With a varied range of both commercial and personal customer groups, here are just some of the reasons why customers might choose to pay for their insurance using premium finance:
- Improved cashflow – freeing up the lump sum to use elsewhere;
- Ensuring they have the required level of insurance cover without being held back by the upfront cost;
- Eliminates the requirement for a large up-front payment to an insurance company;
- Multiple insurance policies can be attached to a single premium finance agreement, allowing for a single payment plan;
- Avoids the need to liquidate other assets to ensure insurance coverage;
- By using other people’s money (leveraging the premium finance lender’s capital), customers can keep a significant amount of capital – known as ‘retained capital’.
Sam Barrett looks at how and why a growing number of insurers are turning to behavioural economics to improve customer relations and drive sales.
Selim Cavanagh offers some advice on unlocking the mass market potential of usage-based insurance.
Environmental protection has risen up the political agenda for many years, culminating in the EU’s Environmental Liability Directive. But how has this affected the insurance market? The Journal takes a look...