Why other banks do premium finance
Let us suppose that there is an industry that is available to your bank that would generate returns to the bank far in excess of almost anything that you are currently invested in.
Let us suppose further that the bank could post:
- Returns on Investment (ROI) of 45-65% and
- Returns on Assets (ROA) of 4-5% based upon
- Net Interest Margins in excess of 4½% (spring 2008).
- We have an Excel proforma so your CFO could prove the numbers.
- Would you be interested? (read more...)
About this web page
It is lengthy page and covers a lot of important aspects about the insurance premium finance industry policies and procedures. Evolution has spent countless man years in order to bring banks this unique way to get non-predatory loans. Insurance premium finance for decades has state statues on how business will be conducted.
Without a doubt, we are secretive about the methodology we created including our four new "Agent Plans" and how our software works in conjunction with all parties involved. To protect our interest, we do not put all the details on the web.
It's also all about the competitive edge it can create for your bank while striping marketshare from other huge banks in this industry. Understand that another bank made close to 65 million in one year from premium finance alone. This can allow you to strip business from them and other banks like them while making it nearly impossible for them to get the business back.
Later, if you should contact Evolution we can arrange to provide all the redacted details we talk about on this web page. Only then, will you understand why we protect it. You would do the same, if you had it.
With that said, if you have an interest and want more in depth information about this program, you can request the book we wrote. We will require a mutual confidentiality agreement to protect each others interest. Also, we can provide additional information, including Excel pro forma spread sheets. (read more...)
To find out more, call @ 913-284-2654 or email us.
Premium Finance company facts
All comparative measurements and benchmarks are based upon analysis of hundreds of premium finance companies over a ten-year time span.
- The industry finances about $40 billion in premium finance per year (way back in 2003). That is about $156 Million dollars per working day.
- National and regional premium finance companies, in terms of sources of business, are not community based.
- The typical premium finance company retains 20% of its income. Performance in the 20-25% range is considered above average, 25-30% is considered good. Performance in the 30-40% range is considered excellent.
- PF companies typically return 25% to 40% on invested capital.
- Banks engaged in lending to the premium finance industry typically start out at an 80% Rate of Advance (4.0:1) and will gradually move the customer to a 90% Rate of Advance (9.0:1). One lender will go as high as 92% (11.5:1). The rate of advance is predicated on the borrower putting up the difference in their own capital. Needless to say, it requires a great deal of capital. A $2 Million line of credit requires $400,000 in capital.
- The mark off of uncollectible balances is negligible. The benchmark number for commercial premium finance companies is ½ to 1% of receivables, with the larger companies (>$100 Million) closer to ½% and the smaller companies closer to 1%.
- Data compiled by lending banks indicates that the most high-tech companies generate a cost of about $36/contract, while commercial companies in the $60-$200MM range (A/R) come in around $80/contract. The largest companies (AFCO, AICCO, Cananwill) using older, legacy receivables management systems run upwards of $160/contract. This is, admittedly a difficult number to assess since there can be so many variables involved.
- Even though it is done every day, disbursing directly to the agent is a dangerous practice at best since it could jeopardize rights to the unearned premium. Most general agents require direct payment. Special programs need to be in place to be able to scrutinize each agent.
- Most premium finance companies focus great attention on uncollectible balances (mark-offs) and require some level of managerial oversight. Every mark-off represents a failure of some sort to adequately safeguard the collateral. A review of marked-off balances provides a little after-action report, which may reveal weaknesses in loan structure, underwriting, collection efforts or agents’ selection of business.
- Fraud does not occur very often, but one fraud can cost a premium finance company so much money in such a short period of time that its prevention must be a major priority. An effective anti-fraud program will consist of employee training, software screening and managerial oversight.
- Premium finance companies can write nonstandard auto business at state maximum rates (20-40%), but banks are not constrained by state usury laws.
- PF companies prefer not to use ACH for insured’s payments because there is too much money lost in late fees if most payments are received on time.
Why migrate to this industry?
After 50 years and $40 billion a year financed, the premium finance industry is not going to change to the traditional banks point of view, so the bank will have to change to the premium finance way of thinking.
If you want to enter the premium finance market you must be willing to look at facts before making any decision. These loans are made without doing any credit checks on the borrowers because the loans are fully secured by the unearned portion of the premium. Premium finance companies never get social security numbers and have done tens of billions of dollars in loans. The only reason the Bank needs to get the social security number or tax identification number is because banking laws require them to do so to comply with CIP requirements of the Patriot Act and BSA/AML Act. Every business day, $156 Million dollars in loans with an industry average mark off of ½ of 1% of accounts receivables is transacted and very few banks are able to tap into it.
Average Mark Off
How is the industry average mark off of ½ of 1% of accounts receivable possible? Most, if not all states have laws like those listed below. It is abundantly clear that the state attorney general is more effective than any collection agency. In fact, in the last 30 years in this industry we have never heard of any premium finance company that was unable to gain satisfaction through state regulators, forcing them to appeal to the attorney general because all carriers know the law.
Return of Unearned Premium
When a financed policy is cancelled, the unearned premium, by law, must be returned to the company that financed the premium. Following are examples of state statutes requiring return of unearned premium. For space reasons all states are not listed.
Insurance code, ch.40, Section 27-40-12
Insurer shall return gross unearned premium to finance company. Return premium must be paid to finance company within 90 days after cancellation effective date. Credit balances must be paid to insured within 30 days after receipt.
Insurer shall pay gross return premium to finance company. Return premium must be sent "promptly".
Insurance dept.. regulations, article xxxiii, section 521(4).
Insurer shall return gross return premium to finance company. Insurer can pay net amount in the case of assigned risk policies.
Insurance dept.. Kansas Premium Finance Act, section 40-2612(e).
Whenever a financed insurance contract is canceled, the insurer shall within 20 days of the effective date of cancellation, return whatever gross unearned premiums are due under the insurance contract to the premium finance company, either directly or via the agent of agency writing the insurance, where an assignment of such funds is included in the premium finance agreement for the account of the insured or insureds.
Insurance laws, section 500.1511(5)
Insurer shall return gross unearned premium to finance company. Third parties must be notified on or before the third business day following receipt of the premium finance notice of cancellation.
Insurance code, ch.59A.12 Subd 1-3
Subdivision 1 requires pro-rata computation of return as well as gross return paid within 30 days of cancellation. Subdivision 2 requires that gross return be computed based upon the deposit premium whenever audible. Subdivision 3 requires that any credit balance be paid to insured within 30 days of receipt of the return premium from company or agent.
Statutes, section 364.135
Insurer shall return gross unearned premium direct to finance company. It requires that return premium be paid to finance company within 60 days after cancellation.
Dept.. of banking, insurance premium financing act, ch.221, Section 14.
Insurer shall return gross unearned premium. Requires that return premium will be paid to finance company within 60 days after date of cancellation or 60 days after completion of the audit. All audits must be completed within 30 days of cancellation date.
Insurer shall return gross unearned premium to finance company. Requires that return premium be sent direct to finance company "promptly" and credit be returned to insured "promptly".
Dept.. of Commerce Oregon statute 746.505(5)
Insurer shall return gross unearned premium to finance company.
Premium finance company act, Pennsylvania insurance laws, ch.4, Article ii, section 11 (40 p. S. Sec.3311).
Insurer shall return gross unearned premium to finance company. Requires that payment be made to premium finance company within 60 days after cancellation. Finance company must refund credit to insured within ten days of receipt from insurer.
Insurance regulation 69-10, paragraph 21-23.
Insurer shall return gross unearned premium. Requires that return premium be paid to finance company within 30 days after cancellation. Paragraph 23 requires that credit balances be paid to insured within 30 days after receipt from insurer.
There are some extra benefits most banks don’t realize exist.
First, it is allowable for a bank to charge interest on funds that have not yet been advanced. This is possible because, by law, interest is charged from the inception date of the policy, regardless of when the contract was signed, received or funded.
Second, because of the payment arrangements between insurance agents and insurance companies, there can be substantial delays between the time the agreement is booked and the date the check is released, adding significantly to the yield.
Last, you are allowed to continue to earn interest on cancelled contracts until the entire premium is returned and all earnings are received before a refund is returned to the insured.
All premium finance loans are collateralized by the remaining unearned portion of the insurance policy. Can you name any other lending activity in which the collateral is returned to you as a check, ready to cash, by a simple notification?
I can’t either. The bank/agent as a premium finance company has the right to cancel the insurance policy and recover the unearned premium because a limited power of attorney has been incorporated into the loan contract and is backed by state laws, which pave the way to the low mark off.
The bank is allowed to continue to earn interest on cancelled contracts until the entire premium is returned (by law) and all earnings are received before a refund is returned to the insured. Regardless of whether the Bank or the agent services the loan, you have state laws in place to keep the mark off down.
Why would agents switch to your bank?
If the bank acts like every other premium finance company they probably won’t. To ensure its competitive edge, the bank will have to change its way of thinking.
The critical aspect to the success of this plan will be utilizing our Agent Plans. The fact that both the bank and the agents are local is a major benefit to the bank. The existing premium finance companies are trying to overcome that long distance barrier by utilizing marketing reps and internet access to reach these distant agents.
Every business wants to be like the local cable television, cell phone, or insurance company that receives renewals on an ongoing basis. Their industries, for the most part, keep growing. This is the other side of the premium finance industry that is phenomenal. It’s only a question of whether or not you want to be a part of it. Retention and renewals mean keeping agents happy. Growth can be very rapid depending on the agents you can keep.
Other bank benefits
New deposit customers increase the bank’s asset base. Remember that you will have a presence in the agent’s office and you can solicit the agent himself for commercial loans, auto and equipment leasing, investment accounts or any other product that the bank offers. In addition, you may have gained access to all of the agent’s customers, another market entirely.
What is the exit strategy?
What if you don’t like the industry once you get started? All financed policies are either 6 month or 12-month policies, and most premium finance agreements are 9 or 10 months in length. It is a very short-term portfolio that can be liquidated in a year.
All personal lines auto and small commercial lines policies are at the state max rates (around 21% APR). As the commercial lines policy amounts get larger the APR’s get smaller, but there is a variation from market to market. We have, however, seen agents charging 48% APR. Regardless, the yields are good enough for the major premium finance companies to aggressively seek commercial lines.
Intro into premium finance marketing
Current Competitive Areas
Premium finance services are marketed and offered in basically the same way virtually everywhere, however the attitude of the individual agent determines the approach to be used. In the past, there were really only six major points of competition that are meaningful to the agent.
The 80/20 Rule
This rule appears to apply to most companies. 80% of the business comes from 20% of the agents. You may have that 20% segment close to your bank.
Some agents may only do 10 loans per month, but those 10 may be for $50,000 each. This agent may only have $20,000 cash capital. The moral is that you never know who will be the top producers.
Evolution's Innovative Methods
We have watched premium finance companies competing for the same business to the point agents cringed every time a premium finance company contacted them with the same old story. We are changing that by listening to the agent.
We have talked hundreds of agents that to do not like the service given to their customers by premium finance companies. Their perception is they are too quick to cancel and, since they don’t know the customer the way the agent does and they refuse to be flexible for those that are always good for the money.
The solution is to offer 4 new unique plans developed by Evolution. At any given moment, ten percent of the agency population is not satisfied with their present premium finance company and will give the business to the next individual that walks into the office and asks for it.
Our 4 new innovative "Agent Plans" and profit
To develop an agent who will be loyal over the long run, the premium finance funding company (bank) will need to commit on the items above: Rate, Down Payment, Check Release, Flexibility, and Service.
This value (not commission) and not a new concept in other industries has led the way to loyalty within other industries so this as well should lead the way to loyalty within the premium finance industry as well. Going back to the question, “How can we get the agents to give us the business?” Evolution's new "Agent Plans".
The bank can offer one or all of our four "Agent Plans". Evolution will explain this value and why it is important, email us.
Premium Finance Loan Agreement APR
If we extend this new value to the agent, rates will cease to be a competitive issue. The agent will want to place his business with the premium finance company and will not “shop” the rate.
The bank benefit is twofold; first the bank just acquired a new bank deposit customer to increase the bank’s asset base and second a customer that will sell the bank all the premium finance business within the scope of our four new agent plans.
If it appears that we are secretive about our "Agent Plans" and how it works you are correct. You will understand why because it should give you such a competitive edge and you will want to do the same. To find out more, call @ 913-284-2654 or email us.
Provide a financial vehicle to achieve long-term loyalty between the agent(s) and the bank while posting significant profits, increasing the asset base and cross selling to the agent.
Through Evolution's "Agent Plans", the bank can create the same successful relationship that other companies have with their agents. (Again not just commissions)
The relationship will be beneficial to both sides. It will be formalized through a contract that spells out mutual consideration between the bank and the agent that will be extraordinarily difficult for any competitor to penetrate.
Premium Finance Market
This industry is generating about $156 million dollars a day and is being given away to various premium finance companies. How many agents are in your yellow pages?
Be in the black in 12 months
This can be a realistic time frame depending on time and effort put forth by the bank and the agents that come onboard. Since 1979, we have witnessed many premium finance companies work themselves into the black very quickly (6-9 months).
What really matters the most? Establishing long-term relationships and reaching break-even within the first year are both achievable. Remember the APRs on these premium finance loans are well above prime. Commercial lines can range from 12 to 20% APR and personal lines usually always go for state maximum rates bringing around 21% APR.
How do you learn?
This premium finance Turnkey Plan is just that, a comprehensive plan to assist the bank in entering the premium finance industry with minimum risk and maximum profitability.
In addition to consulting services of the principals, Evolution can provide educational materials, on-site visits, training, software, comprehensive monitoring, recommendations for regulatory compliance and third-party servicing.
Evolution is fully aware of the multitude of compliance issues facing a bank that embarks on any new venture. We are familiar with requirements spelled out in the Patriot Act of 2001, BSA/AML Act, Gramm-Leach-Bliley and Sarbanes-Oxley Act 2002. Those requirements of the Patriot Act and BSA/AML that directly affect premium financing, such as risk assessment and customer identification are directly addressed through EVOLUTION’s software and procedures. We provide the third party technical and industry expertise required by the OCC and FDIC.
The Community Reinvestment Act
The software (below) has the ability for census track gathering and reporting.
Evolution created this unique software keeping in scope of the Evolution's "Agent Plans", a key element in accomplishing our objectives.
To find out more, call 913-284-2654
Interested? (read more...)