NY Premium Finance Questions

[AgencyHV]

We are setting up a new insurance premium finance division at a bank in NY State and are looking to set up without the use of drafts being given to insurance brokers. Do any brokers feel that not providing drafts will limit our ability to write premium finance? As an insurance broker, I had always done business through the use of drafts provided by the premium finance company, that I would make payable to the insurance company. After seeing the huge amount of fraud out there via use of drafts we want to structure without (type premium finance fraud in the Insurance Journal search box.) Thanks in advance for any comments.

[mclureins]

I HAVE OWNED A PREMIUM FINANCE COMPANY IN CALIFORNIA FOR 7 YEARS NOW AND I CAN HONESTLY SAY I THINK DRAFTS HAVE QUICKLY BECOME A THING OF THE PAST. I DID HOWEVER FIND A GREAT MANAGEMENT SYSTEM FOR PREMIUM FINANCING FROM ADVANCED INSURANCE SYSTEMS. THE ONLY BENEFIT OF USING DRAFTS FOR ME WAS GETTING THE MONEY TO THE G.A OR CARRIER QUICKER. BUT THE AMOUNT OF MONEY I SPENT ON COLLECTIONS AND LAWYERS AND DEALING WITH DISTRICT ATTORNEYS? NOT WORTH IT. OUR COMPANY STILL FINANCES WELL ABOVE WHERE WERE WHEN WE DID USE DRAFTS. ITS ALL ABOUT CUSTOMER SERVICE, PAYMENT CONVENIENCE AND BEING EFFICIENT. GIVING YOUR AGENTS A GOOD INCENTIVE ON COMMISSION ALWAYS GO NICELY TOO. LAST TIME WE USED DRAFTS WAS IN 2008 AND WE HAD ALMOST $87,000 IN WRITE OFFS OF FRAUD. NOT COUNTING ALL THE EXPENSES WE HAD TO PUT UP AS WELL. AND THAT WAS AGAINST 3.6 MILLION IN CIRCULATED FUNDING. PREMIUM FINANCING IS ALREADY A RISKTAKER IN ITSELF. I SAY LEAVE IT OUT AND SAVE THE HEADACHE.

GOOD LUCK TO YOU!

[AgencyHV]

Thanks mclureins for your reply. It is reassuring to know it is your opinion too that we can do business without using drafts. I wasn't sure if non use of drafts would limit our growth, but it looks like you've been able to grow. We looked at all premium finance backoffice companies I could find, including AIS. Theirs looks very good but if I remember correctly they only offer the option to do business outsourced to them. We are looking to structure with running all the administration in house, and growing gradually. It looks like the cost structure will be much lower in house, and we will retain all control without letting it get away from us.
I had come across a few premium finance companies that did business with outsourcing, and they then found substantial cost savings converting to a system to bring it in house.

[AgencyHV]

Hello Grinshan, I'm not sure based on your response that we are discussing the same type of arrangement. With the premium finance that my question applies to it is where a broker will write insurance policy(ies) for an insured. Say for a total annnual premium of $10,000. Instead of making some larger payments, the broker may offer the insured the option of financing the premium. Our premium finance company will offer to finance the premium with a smaller down payment and then 9 installments. To my question, some premium finance companies will provide the brokers with blank drafts (checks) that the broker has the authority to sign. This is where there has been a large amount of fraud. I have been asking brokers if doing business without giving brokers drafts may limit our ability to finance policies. The answers I have been getting is that it appears the use of drafts have been declining. Drafts appear to be becoming a thing of the past. If anyone feels otherwise, that in some types of transactions they are necessary I'd appreciate hearing. Thanks!

[pita3333]

AgencyHV: My most recent experience with financing in agency was that we completed the financing contract online.
Then on the following Monday we got a funds transfer into our account representing all the contacts created in the past week along with a detail.

We then "posted" the funding against our clients accounts and all worked extremely well.

[AgencyHV]

Thanks Michael for your reply. I pulled up the website for your company and see that your firm specializes in providing service to insurance agencies. When you say that the premium finance company transfers money into your account for you to post to clients accounts I see the potential for similar fraud concerns. Most insurance brokers are trustworthy but there are cases sometimes with a change in office staffing where fraud arises.
We are looking to structure paying the insurance company directly. The goal is to offer the most competitive financing rates available. One way to accomplish this is to minimize fraud. Do you have any accounts where the premium finance company pays the insurance carrier directly? Do you think this would reduce policies you will be able to finance?

[Mainemiss]

Work flow and agent commissions have led to the electronic transfer of the financed amount into the agent account. The agent will collect the downpayment indicated, usually 25% particularly if there is an earned premium applicable and then when the finance company transfers their portion the agent will pay their account current directly to the company or broker and retain their commission which is anywhere from 5-15%.

Most excess lines companies and brokers are not structured to pay monthly commissions and having the agent retain their commission is the smoothest way to manage the transaction. Before finance companies began transferring the funds into the agent account the agent would collect a downpayment and then try to co-ordinate the payment of the portion after commission deduction with the payment from the finance company directly to the company. A rather messy workflow.

Transferring to an agents trust account should not open up fraud potential as it would become apaprant quite soon if the company never received their premium and cancellation notices were mailed out. Not like draft authority which could go on for some time before being discovered.

[AgencyHV]

Thanks Mainemiss for taking the time to clarify your premium finance structure. That helps...
We were looking to focus on paying the insurance company directly whenever possible. Do you ever work under this type of arrangement? Going this route we are looking to minimize fraud, and keep rates as low a possible.

[Mainemiss]

As I mentioned, we used to have to struggle with subtracting our commission from the client's downpayment then writing a check for the remainder and sending that to the insurance company and often not having the insurance company match up the payment from the finance company with the payment we made...too time consuming.

If your plan is to have the agent turn the client over to you for the downpayment and completed transaction paying the premium to the insurance company how will the agent get paid their commission? What about additional costs for endorsements during the policy period? Are you considering managing the transactions between the client and company?

The easiest way for all is to fund the agent who is on the hook by contract with the company and in whose best interest it is that the company be paid in a timely manner...unless they are planning to close up shop and run off to Tahiti. In that case a little research before you contract with an agency should solve that problem.