Vertical Integration Incorporating Captive Premium Finance – Simple, Secure, Cost-Effective

Nov. 22, 2010 - PRLog -- St. Louis, MO -  Outside premium finance companies make big money using the assets that an agency, an agent, a broker, a program manager, a MGA, a bank with commercial insurance operations and a commercial lines insurance company (collectively referred to as “insurance agency” or “agency”) create from the policies sold by the Agent. Consequently, RIGHT NOW can be a very good time for forming a captive premium finance company as an affiliate of an insurance agency.

VERTICAL INTEGRATION

Vertical integration of related products and services can provide additional benefits  among which are:

•   New business creation.
•   Value added selling.
•   Higher degree of control over the entire value chain.
•   Time savings - reduce/eliminate hold-up problem.
•   Maximize income and profits from company assets.
•   Gain in market power.
•   Improved retention of existing business.
•   Better opportunities for investment growth through reduced uncertainty.  

Vertical integration can facilitate interaction of the four (4) basic insurance operations (insurance companies, underwriting agencies, retail agencies and premium finance) to capture premium and ancillary risk and commission income and fees that may be generated from insurance policy sales.

COMPONENTS OF ANY PREMIUM FINANCE COMPANY

There are only three (3) basic elements to any premium finance company (PFC):
1.   Policy premiums to finance – the primary earning assets of an outside PFC are the policy premiums you give them to finance.
2.   Capital to fund loans – owner invested capital and leveraged/borrowed capital.
3.   Backroom operations with 50-state PFC expertise, comprehensive premium finance management system and experienced operations and customer service.

For a Captive PFC (using the “Own Your Own”® premium finance model):
1.   An agency should be routinely financing $100,000.00 or more per month in commercial lines premium for captive premium finance to be the best use of an agencies invested capital.
2.   An agency will need to invest capital to fund loans initially and as collateral to secure leveraged/borrowed capital to fund loans. Though it varies depending upon the total amount being financed, typically lenders to captive PFCs will require owners to have an initial investment of at least $50,000 invested and the amount may be dictated by state regulation; CA, for example, requires owners to have $75,000 capital stock in the bank account of the PFC before incorporation will be granted.
3.   Outsourced third-party administration should be experienced and capable of operating in all fifty (50) states; should have a comprehensive, state of the art, premium finance management system to support PFC operations in any state; and, should have experienced management, technical, administrative and customer service staff with expertise in all facets of captive premium finance operations.

VERTICAL INTEGRATION OF CAPTIVE PREMIUM FINANCE –
WHY NOW?  WHY AT ALL?

•   The soft market and current economic conditions have put a strain on corporate cash flows and profits.  Positive cash flows are being impacted negatively; the ratio of cash income over expense is declining.  As an agency seeks relief and methods to improve cash flows financing of insurance premiums will more likely be viewed as a reasonable use of credit. When the market hardens profit ratio increases will follow.

•   Offering premium finance as a step in the insurance sale close process ought to increase in general within the industry and the buyers of insurance, your clients and prospective clients, will view it positively.  

•   Offering premium finance as an option should be seen by buyers of insurance as a clear indication that the agency has thought through the entire sales process rather than just as a seller of insurance policies.  Frequently this results in:
     -  An increase in the ratio of policies financed to policies written.
     -   An improved perception of the agency as a professional who has offered a solution to a problem without having the buyer acknowledge their need for improving their cash flows.

•   Unusually low interest rates are being paid on short-term investments.  Short-term investment income is a material portion of the current income of insurance companies.  The market has driven this income down to levels not seen in over fifty (50) years. The problem for the insurance company becomes how to increase the number of dollars to invest short-term to an amount that will generate a hard dollar income.  Raising the unit cost of insurance will help, but will not be a full cure.  The insurance company would likely be looking for ways to speed cash flows and may look for alternative methods of collecting insurance premiums faster from the insured.  This could result in a reduction of the protracted payment terms being offered by many underwriting companies.  Insurers may begin to reduce these offerings demanding more units be written on a cash in advance basis.  This will benefit premium finance companies by driving more units into the premium finance arena.

•   Captive PFCs, like outside PFCs, ought to be able to improve their current spread (spread being the difference remaining after deducting the cost of funds from income) by increasing the charges for premium finance.  As the spread improves profitability increases.

•   Creating a captive PFC with an outsourced third-party administrator will allow an agency to move into the market of financing premiums at this opportune time.  

•   It is always a good idea for an agency to be able to control their own premium finance activity, but today it is an even better, more financially viable, idea.  The agency gains by being able to:
     -  Integrate the material asset it creates by its sales effort under its own business umbrella.
     -  Determine rates and financing terms/conditions (within state regulations).
     -  Add a significant profit center to their existing business structure without increasing staff or expense.
     -  Minimize the inherent risk through outsourcing to qualified third-party administrator.
     -  Improve customer service.
     -  Enhance its image to existing clients and prospective clients.

TIMING IS EVERYTHING!

•   Depending upon the state in which an agency incorporates and licenses its captive PFC, the process from start to finish may take less than sixty (60) days.

# # #

About AIS: Automated Installment Systems, Inc. (AIS), headquartered in St. Louis, MO, is the leader in client-owned insurance premium financing company development, management and third party administration. AIS originated the concept of outsourced services for premium financing in the early 1980's. AIS was the first in the country to offer commercial insurance operations a truly full-service premium finance management system. Clients of Automated Installment Systems utilize AIS’s "Own Your Own" premium financing product and its proprietary EPITOME ® System technology to provide in-house premium financing options for their insureds. Find out more about the benefits for you/your company @ http://www.automatedinstallment.com/aboutAIS.htm; or call 800-624-6308 ext. 326 to schedule an online meeting and demo of the AIS "Epitome" System.