​The growing complexity of Lenders Finance Agreements: What do brokers need to know?

Allianz is working with brokers to raise awareness of Lenders’ Finance Agreements (LFA).  

This is because it is becoming increasingly tricky for brokers, who need to understand the potential implications of lenders’ agreements, to inform their customers accurately as timeframes to turn around LFAs are very short.  

The complexity and nature of these arrangements are also creating challenges for insurers due to the time it takes to process requests.  

Typically, LFAs land on insurers and brokers desks immediately prior to the drawdown of finances; this has the knock-on effect of creating a very short time frame to resolve the request.  

What is an LFA? 

A Lenders’ Finance Agreement is a loan agreement in which the lender, usually a bank or financial institution, sets out terms and conditions declaring how it is prepared to make a loan available to a borrower.  

For example, if a property or a business owner takes out a loan, the lender will then want some security against that loan – a similar principle to a mortgage. 

Finance agreements routinely set out how the lender’s interest in an asset is to be secured in the borrower’s insurance policies. 

Part of the finance agreement for the loan includes how the lender requires their interest to be secured in borrowers’ insurances. The facilities agreement contains the detail of how borrowers’ insurances should be arranged.  

It is highly unlikely, however, that a standard policy will comply and include the obligations that the lender wants; therefore in order to receive the loan money, borrowers’ insurers must make amendments to coverage.  

Taking action

Allianz has been engaging with Biba to raise awareness of LFAs. It has also rolled out face-to-face training with underwriters and created broker resources such as leaflets.

The insurer futher aims to make the topic easier for customers to understand. But, the challenge is that brokers need to be aware of potential implications prior to the LFA request coming in.  

Since the demise of the British Bankers Association and the Association of British Insurers (ABI) bank Agreement (2012) Lenders Agreement, there has been a sharp increase in the number of requests for bespoke amendments to policies at the request of lenders.  

Lenders also all have different requirements now - this gained further momentum when banks started drawing up their own requirements.  

In a breakfast briefing last month, Allianz’s head of property insurance Paul Higham, stressed how important it is that brokers are aware of the implications.  

Allianz is now seeing these types of requests coming in much lower down the property scale, whereas previously it was only seen for larger real estate.   

“This is why it’s becoming a challenge in the market, because they aren’t easy to solve, the implications to customers are significant and the time frames are tight.  

“Since 2012, there tended to be more onerous conditions on larger assets, but it’s becoming increasingly common in other areas from small lending to SME customers,” he added.  

Therefore, both brokers and customers should be aware of the implications when dealing with lenders’ requirements.  

Decision maker 

The lender is also defined as a decision maker in the LFA contract, which means they are entitled to negotiate claims and how these are settled in the terms of the policy. This is because the lender is also a party to that contract.  

This means less control for the customer, as the lender has the same rights as the policyholder.  

Higham said: “Customers often want insurers to agree to these contracts, they have done all the leg work.”

For businesses and properties that have been invested in, Higham added: “What brokers and customers often do not understand is that some of those policy conditions means that if the building burns down or if there is another loss event, the lender can then decide what to do.  

“This can leave the business high and dry, although this wouldn’t be the intention of the lender, but these conditions mean that can happen. And they’re the scenarios we want to avoid.” 

What do brokers need to do? 

Allianz wants brokers to understand the potential implications of lenders’ agreements and make customers aware in advance of completing any significant financing or re-financing.  

It also wants brokers to be able to explain the complexity of the situation, and that there may be an additional charge if the insurer is widening cover at the lender’s request.  

Allianz would also like brokers to remember existing clauses and agreements at renewal, particularly if they are changing insurer.  

However, some brokers are pre-empting issues by ensuring their client’s lenders are advised upfront on what insurers will and won’t accept. 

Industry standard 

When asked if there should be an industry standard for lenders’ requirements, Higham said: “I think we are too far down the line to get [a] market agreement now.” 

Allianz did engage with the ABI six or seven years ago when this first became a problem, but as the implications and coverage were vastly different, the issue was classified as a market competition issue because every insurer has a different appetite.  

As a result, insurers have been left to deal with LFAs as they see fit.  

“For us, it’s mainly around broker education, to have those conversations as early as possible so that customers understand the implications,” Higham concluded. “Now we want to engage with brokers and help them understand it and help them help their customers.”