Profit by extension

Building up and maintaining a broker practice doesn't rank among the easiest of jobs. So brokers owe it to themselves to maximise the possible returns on effort and resources committed to the business by ensuring that they are able to offer (and receive remuneration for) every reasonable aspect of service to their clients.

One very obvious area where firms cannot only generate additional revenue for the work they already undertake, but also add value to the service they offer, is premium finance.

Yet our recent research suggests that brokers could be missing out on millions of pounds of extra commission simply because they don't explore the possibilities of offering this logical extension to their service.

Our survey, carried out with more than 1,000 commercial lines brokers, revealed huge variations in the levels of premium funding offered by different firms. While it revealed some who finance up to 35% of their book (and sometimes more for scheme business), other similarly profiled firms finance less than 10% of their gross written premium (GWP). This gap can equate to missed revenue of up to £20,000 per £1m of GWP - a not insignificant sum.

Penetration growth
We carried out the survey to prove that active account management and commitment from both financer and broker can rapidly grow penetration of the finance product. And with tougher economic times predicted, it must add value to any broker to offer clients an additional service that also increases the broker's bottom line.

But if brokers could build further value into their own businesses by the simple act of adding a premium finance facility to their portfolio, why then don't more brokers do so?

I suspect the reasons will be similar to those often cited for not taking a new step. What it often boils down to is: as the current arrangement is working, why change it? In practice it is relatively easy to include premium finance in a firm's business and, at the risk of repetition, it does add a lot of value.

While there exist wide variations between how much premium finance brokers offer clients, there are some patterns as to how those variations break down. Brokers who make the commitment to contract with the financer with solid growth targets also outperform those who take a less planned approach, and larger brokers are generally more successful in maximising penetration than smaller firms.

Perhaps smaller brokers, given limited resources, feel more wary about taking on additional levels of service. While it is possible to sympathise with that view, it is hard to reconcile it with the millions of pounds of unrealised broker market profit that result.

For instance, a broker producing £10m GWP per annum which finances 35% of that business and receives a 2% commission on that finance will add about £70,000 to revenue in the year. And, thinking of the long term, using a 1.5 to 2 times commission multiple when valuing the business, this could add £105,000 to £140,000 to the value of the business.

All of this is achieved by simply leveraging more value from the broker's existing client bank while at the same time adding value to the client service package.

Managing cash flow
But the benefits of premium finance go beyond simply generating extra income. Premium finance is great for managing cash flow - and reducing administration at the same time. If a premium finance provider is involved, the broker is guaranteed the premium on time.

What's more, one finance agreement can cover multiple policies, and it's possible to renew a policy, change insurer, and allow for mid-term adjustments and additions to cover without the client having to sign new paperwork. There's less administration and more peace of mind for the broker with premium finance.

The most advanced premium finance providers use sophisticated technology to make the broker's task as easy as possible at all stages: handling the initial application; answering client queries during the process; collecting the finance payments; and keeping on top of account management.

Leading finance providers offer full integration with the broker's existing software platform, which eliminates double keying of client data and enables automatic reconciliations. In other words, these days it takes very little effort to arrange and manage premium finance.

And a relatively small effort today could mean a significant long-term addition to revenue and business value, which must be worth it. IT

Tim Wilson is sales and marketing director at Close Premium Finance