Premium Funding: An increasingly Important tool in a broker's toolbox

With businesses of all sizes affected by increasing prices and inflationary pressures, could premium funding become an even more important part of the broker toolbox?

BY MARTIN WANLESS

From the price of grapes to the cost of filling up our cars at the fuel station, we’re all only too familiar with the escalating costs straining already tight budgets.

And while our household bills are increasing, so too are our business outgoings.

The costs of many business expenses, insurance premiums included, are increasing too, meaning businesses and brokers are facing a challenge.

And, while reducing cover and increasing excesses is one way to create a more manageable premium, it may not be the wisest course of action. After all, as a broker, you want to ensure that your clients have the right cover.

This is why premium funding is becoming an increasingly important part of a broker’s arsenal.

“Business insurance premiums can be an inconveniently large investment,” says Mark Beshay, Head of Sales at Elantis Premium Funding. “This is particularly relevant in the current market, with widespread economic uncertainty and premium rates on the rise.

“Premium funding is a payment solution that can help to maintain essential insurance coverage, while keeping cash and/or other business finance arrangements available for other immediate investments that directly impact the growth of a business.

“It enables clients to spread their annual insurance costs across smaller instalment payments throughout the year, instead of incurring a large single upfront payment, providing greater cash flow flexibility. Put simply, premium funding helps to make insurance more affordable.”

And the cash flow angle is hugely important, especially given that cash flow, rather than a lack of profitability, is often a reason for businesses failing.

“Cash flow finance, which is the category that premium funding comes under, continues to trend as a key priority for not just SME Australia but for corporate Australia too,” says Bradley Bartlem, Chief Executive Officer at Hunter Premium Funding.

“Over the last five years, insurance rates have continued to increase, which has actually put a lot of cash flow pressure on customers, and we’ve seen increasing interest in premium funding.”

One of the challenges the premium funding sector has faced, however, is awareness, with premium funding sometimes left unconsidered in favour of other premium-reducing levers being pulled.

“One of the challenges we have is the awareness of premium funding as an industry,” says Brett Morcomb, Senior Specialist at Hunter Premium Funding.

“We’ve recently conducted some customer research and we know that if customers are aware of premium funding, then they will consider it.

“Our challenge as an organisation, and as an industry, is to create greater client awareness of premium funding, and to make sure that our brokers understand the value and flexibility it can provide to their clients.

THE DELICATE MATTER OF FINANCIAL DIFFICULTY

The need for clients to apply for premium funding may be a delicate one, and brokers need to broach the subject carefully. “Clients experiencing financial difficulty is a sensitive topic for many, so it’s important to show empathy and understanding when dealing with clients in this situation,” says Beshay.

“It’s a good opportunity to reinforce your value as a trusted adviser in the hard times as well as the good. Being proactive, recognising vulnerability, communicating effectively, and responding with options where possible is key to a longstanding relationship.”

For brokers, of course, there’s an inherent reputational risk when recommending premium funders. After all, your client will trust that you’re confident in the company you’re suggesting, and you need to ensure that you’re setting your client up with a company that’s going to both provide a good experience and look after them and their business.

“Whichever premium funding company you deal with, make sure that you’re very familiar with their customer hardship provisions,” says Bartlem.

“As a broker, it’s very important to understand what happens if your client can’t pay. Does it mean that their insurance policy will be cancelled?

“Different funders have different approaches, and moving into these difficult times, it’s really important that brokers understand what hardship provisions are in place if the worst does happen.”

HELPING CLIENTS MAINTAIN THEIR LEVEL OF COVER

Premium funding is a potentially good solution for clients to enable them to afford the coverage they need, and ultimately solves a problem for brokers too.

“That’s the value that premium funding can play in challenging times,” says Bartlem.

“If you think about it from a customer perspective, when they receive their premiums and the amount is daunting, they might decide to change the level of cover to be able to afford it.

“The benefit of premium funding is that customers don’t have to change their level of cover to afford their insurance. From a broker’s perspective, customers aren’t underinsured, and paying with premium funding also improves their cash flow.”

And, in a world where financial pressure is increasing for many of us, the ability to access premium funding could become ever-more attractive.

PREMIUM FUNDING CODE OF PRACTICE

NIBA members are very familiar with codes of practice, and the premium funding sector is undergoing a similar process, with an Australian Finance Industry Association (AFIA) Code of Practice due to come into force in October 2022.

“It’s going to be a major, major change to the industry,” says Bradley Bartlem, who has been president of the development of the AFIA Code of Practice.

“The premium funding industry didn’t have a code of practice, so we’ve been working quite extensively with a number of stakeholders, including NIBA, to get a code in place.

“In terms of underlying principles, it’s very similar to what has happened in mortgage broking and insurance broking, where there’s this view of customer fairness, transparency and disclosure.

“The overarching thing is making sure everyone acts in the best interests of the customer.”