Premium Finance Commission – Can the dream last?

As a great business leader in the Insurance broking industry once said to me – “There are only 3 ways of making money out of insurance broking and I always aim to maximise them all – commission income (squeeze those greedy insurance companies), fee income (charge as much as is reasonable) and premium finance commission (f*** those insurance premium finance providers)”.

Nice guy that business leader and as he then he told me about his next round the world holiday on a private jet, it was clear he was doing something right!

As I am the CEO of a premium finance lender I hope you don’t mind if I talk to you a little about premium finance commission.

Lenders love premium finance. It’s finance for an essential product, so borrowers pay and even when they don’t pay, the ability to cancel policies and claw-back premiums or better still ask the introducing broker to pay up makes it the safest form of lending out there.

So premium finance is a brilliant product for lenders, who are therefore willing to pay brokers a lot to get the product onto their balance sheets.

Premium finance is also brilliant for insurance brokers, as it helps them sell their insurance products and at the same time earn a healthy premium finance commission income on top of their insurance income. As the premium finance income is incremental and they effectively don’t have to do any extra work for it, the income from premium finance income can slide nicely down to the bottom line. This now means that many insurance brokers make a substantial amount of their income from premium finance. Indeed, some insurance brokers make all their income from premium finance commission, often running their core insurance broking business at a loss.

Finally let’s get to the most important party, the customer. Premium finance is brilliant for the customer, it enables her to spread her payments over a number of payments, therefore enabling her to drive her car or protect her home and valuables.

What a great dream product premium finance is – everyone’s a winner.

Well maybe not everybody. I can see a clear winner and 2 other parties – can you?

Let’s start with the poor premium finance provider. Is he really a winner? Due to intense competition in the market, premium finance providers have had to thin their margins to the absolute minimum in order to win broker’s business. This has on a number of occasions led to price wars for a key broker’s business. The poor lenders, bless them, have also had to do wonderful things for brokers, like provide attractive marketing allowances. So definitely 1-0 to the broker against the lender.

At least the customer is a winner! Or is she. The customer has been offered point of sale finance by a broker, which wants her to buy his insurance. It’s quick and convenient, no form filling, no difficult questions. The monthly payment seems ok, yes, the APR appears a bit high, but what is that anyway? Does the customer know that to earn premium finance commission the broker commonly increases the lenders rate by 3 or 4 times and in extreme cases nearly 10 times!

Oh dear, maybe the customer isn’t a winner. So, it’s 2-0 to the broker.

I don’t want to be a party pooper, but you have to admit this dream can’t last for ever.