Double trouble

The premium finance market has never been exactly overcrowded. Even in the halcyon days before the credit crunch, when money was cheap and plentiful, the two largest players, Close Premium Finance – part of Close Brothers – and Premium Credit – owned by Bank of America – dominated the sector, leaving other players effectively battling for the scraps.

These days, however, even the scraps are being swept up by the big two.

Their smaller rival, The Royal Bank of Scotland-owned Finsure, accounted for around 10% of the market. It stopped writing business last May and will finally disappear from the market early next year, leaving Close Premium Finance and Premium Credit controlling at least 95% of the market, according to most brokers. Both firms declined to be interviewed for this article.

State of play

Specialist premium finance accounts for less than 20% of premiums, but it is worth an estimated £3bn a year. A straw poll of the industry revealed that the big two can typically charge anything between 3% and 5% for non-recourse finance over 10 instalments and as much as 8% for recourse.

However, even before the credit crunch took the scalps of smaller players, the market was hardly awash with low rates, despite the fact that the larger pool of companies meant some providers chased business by selling cheap deals. Unfortunately, when the credit crunch collided with those deals even that fledgling competition collapsed.

So what effect is the shrunken market of specialist providers having on brokers? Is the comparative lack of choice pushing rates up?

“Rates aren’t really the problem,” says Jason Cobine, who runs small London broker Cobine Carmelson. “I haven’t noticed any increases since Finsure’s closure. The two established premium finance companies will credit-check policyholders a bit more often now, and some will fail those checks. At that point, clients will look at other options, and the bottom line is rates are going to be higher for firms that aren’t deemed creditworthy. Basically, if Close turns you down – and they can pick and choose now – you could have a problem getting finance and paying your premium.”

Arguably that was already the case prior to the demise of Finsure and the disappearance of the many other smaller providers during the credit crunch. Consequently, most brokers report that there is no appreciable change in the way the post-Finsure market operates despite the ever-diminishing choice of providers.

Biba head of technical services Peter Staddon doesn’t believe that this current lack of competition is inevitably bad for the industry. “We have a duopoly in premium finance now, which could be a concern, but the two main players are very competitive. I don’t think anyone could say that rates are artificially high at the moment,” he says.

“A lot of brokers do have concerns inasmuch as they see the Bank of England base rate of half a per cent and ask why they are paying upwards of 2% for financing, but of course premium financing is based on the Libor rate, which hasn’t come down as much as the base rate.”

Libor, the rate at which financial institutions lend to each other, soared during the credit crunch but has been rising again this year. In mid-July, euro Libor hit its highest rate in nine months.

In addition to keeping premium finance rates at their current level, the continuing high cost of money also means that the chances of new entrants gatecrashing the market and taking on the established duopoly are slim because traditional sources of capital – investment banks, hedge funds and private equity firms – remain under pressure.

Cash is not the only obstacle to future entrants to the market. The high-profile collapse of Kaupthing Singer & Friedlander two years ago, which provided premium finance through its subsidiary PF,  has left most brokers sceptical about new players.  “Brokers are wary of new entrants. Kaupthing dipped into the market and went pop, and quite a few brokers got their fingers burnt. Reputation is everything for an insurance broker and the failure of your premium finance provider isn’t good,” Cobine says.

For that reason, the longevity and stability that Close and Premium Credit represent will make it difficult for new entrants to make serious inroads. It is worth pointing out that Kaupthing and Amber Credit –  the loss-making personal lines premium finance arm of Skipton Building Society – were both snapped up by Close Premium Finance. Close also reached agreement with the administrators of the ill-fated Aascent to run off its loan book and, according to most in the industry, has also ended up with the majority of Finsure’s clients.

In short, Close and Premium Credit have demonstrated that they are stable companies, and able to offer a long-term relationship that provides brokers with greater security and uninterrupted access to cash. “I would like to see another player in the market, but it needs to be sustainable,” Staddon says. “Part of the problem for new players is whether they attack the part of the market that already gets funding or the part of the market that doesn’t.”

Outside the two-horse race

Therein lies the problem. What happens to those who fail to get finance from the big two? Against the current backdrop, it is likely that premium finance will be a two-horse race for some time. The Competition Commission, the OFT and the FSA have no plans to examine the current duopoly, so short of waving your credit cards with gay abandon when it comes to stumping up for your premium, what options are there for the part of the market that cannot get funding?

There is the DIY route. Finance group Bexhill offers a tried-and-tested model for brokers to set up their own premium finance facility for clients.

Under the Bexhill model, the broker must establish a separate finance vehicle that collects the initial monthly instalments from the client. When it is the time to settle the premium payments with the underwriter, the finance vehicle borrows the difference from Bexhill to top up the cash already collected and pays the money to the broker. The number of brokers using this model is increasing, but it still remains a small part of the specialist market.

“In principle we’re different [from specialist premium finance] in that we work more like a bank,” Bexhill UK’s head of operations Olga Smith explains. “The financial vehicle is a separate business that operates beside the brokerage, and we lend money to the vehicle. We also support the debit facility that enables the broker to debit clients.”

She adds: “Our rates are usually lower than the two big players, but in essence we’re less expensive because, with our model, brokers are already getting cash in from their client so they are borrowing less to finance the premium.”

Biba’s Staddon says that the Bexhill model works well for a number of brokers, but doesn’t fit everybody.

Another alternative provider, Broker Brightside Group, has operated its own line of premium finance since its inception, although its model is entirely different to Bexhill’s.

“As long as you have bulletproof processes and funding lines, it is beneficial to control your own premium finance destiny,” the firm’s chief operating officer Simon Pearce explains. “We manage everything in-house; it is built into our business.”

The number of premium finance loans processed by Brightside increased by 15% to 157,000 in 2009, and Pearce adds that the group is set to achieve at least 175,000 loans this year. “It’s a drop in the ocean compared to Close and Premium Credit, but we control the customer experience, we control the margin, and it’s a profitable line of our overall business,” he says.

Brightside uses a panel of finance companies to fund the business. Pearce concedes that to operate a premium finance operation you need “a shed load of money” along with expertise in running it. “We do get approaches from other brokers for premium finance, but we don’t want to be clouded by business with other brokers,” he says.

Double or nothing?

But running a credit business alongside a brokerage doesn’t suit everyone. Broker CBG Group effectively outsourced its longstanding in-house premium finance operation to Close Premium Finance last year.

“We have historically operated our own premium finance business but found that, as CBG grew, it tied up a large amount of working capital,” CBG finance director Martyn Hughes explains. “It was a profitable business, but we took the decision to enter into an agreement with Close Premium Finance.” For CBG, the deal with Close has enabled it to free up cash and reduce both gearing and funding from its bankers.

Placing a large chunk of your business with one premium finance group allows you to negotiate a better deal on rates, but larger brokers are in a better position to drive a hard bargain than smaller ones. So where does all this leave brokers desperately seeking premium finance for the less creditworthy?

The bottom line is that, following the abrupt collapse of rival premium finance firms in the last two years, Close and Premium Credit are pretty much the only providers that retain anything akin to credibility in the sector and are benefiting from what is simply a flight to quality.

With barely anyone else around to sweep up those clients that Close and Premium Credit won’t provide finance for, any brokers with a poor-quality book look set for an uphill struggle until some liquidity returns to the financial markets. IT