Expert View: Premium finance funding is an opportunity for brokers

A question on the lips of a number of insurance brokers is whether they should self-fund their premium finance rather than rely on third-party providers.

We have been advising insurance brokers on premium finance self-funding since 2002 and with our support more than 100 UK insurance brokers now own and operate their own premium finance business. Some of the largest insurance brokers in the UK have been self-funding their clients for years.

In today’s market everybody seems to be lending: peer-to-peer lenders allow grandmothers in Bolton to lend to secretaries in London. The question is why aren’t more brokers lending to their clients?

We have proven data that shows that any insurance broker that sets up its own in-house premium finance company can become self-funding within one to five years. Self-funding means having all the cash required to finance all your clients without relying on a third-party funding provider.

There are several reasons why brokers might consider setting up an in-house premium finance facility. 

First, the FCA is becoming increasingly focused and concerned about the commissions brokers are making from the add-on premium finance product.

Some brokers only make a modest commission, but we understand that even rates of 1% are being questioned by the FCA. But other brokers earn a far greater commission, which in many cases dwarf the net rate provided by third-party funders. These commissions are not sustainable. By contrast, a lending rate charged by a finance company is not a commission and therefore as long as it is below the High Cost Credit Rate (currently 100% APR), it is deemed to be more of an appropriate reward for the risk taken. 

Secondly, brokers are more concerned with maintaining control of the customer journey. Using a third-party finance provider is a break in the journey outside the broker’s control. Many brokers want to retain this control and ensure high quality service to their clients by controlling financing and charges for mid-term adjustments, failed direct debits and arrears letters.

Thirdly, brokers wish to maximise the return on any cash equity they have accumulated.

Brokers need to weigh the benefits of simply broking their finance business to a third-party lender and lending to their own clients. There are benefits to each model, but as the banks continue to offer little or no return for deposits, brokers like everybody else in the market are looking for better returns on their hard-earned cash.

Ravi Takhar founded Bexhill UK in 2002 and has more than 25 years’ experience in the acquisition, growth, financing and disposal of financial businesses. Prior to creating the group, Takhar was head of financial services investment at Japanese investment bank Nikko, from 1998 to 2002.