Lending support

Premium funding plays a key role in cashflow management – in good times and bad

By Wendy Pugh

The role of premium funding in helping businesses balance financial commitments tends to fly under the radar, but now the funders themselves are looking to raise awareness of their role.

Funding firms typically work through brokers to offer business clients a way to spread annual premiums over the year, providing a cashflow management tool whatever the circumstances.

“If clients are in a difficult market or their segment of business is in challenging times, we are a good option,” IQumulate Premium Funding Chief Executive Raj Nanra says. “Conversely, if they want to keep reinvesting in their business, there is an opportunity cost of ‘do I spend more money to grow my business or do I pay my insurance premium’.

“For a short-term cash flow solution they can look at funding.”

When it comes to tough times, recent natural disasters have highlighted insurance affordability issues and the importance of businesses having the right cover in difficult circumstances as they face further cost-cutting pressures.

“Some of the challenges are still around underinsurance,”

Mr Nanra says. “That is where we believe we can work with the brokers to help their clients and get them the right outcome from a coverage perspective.”

“No-one wants to hear after major events that there is underinsurance or even no insurance.”

Mr Nanra was speaking with Insurance News following the catastrophic summer of bushfires, hailstorms and flooding, which has led to claims totalling more than $4.5 billion. Since then the coronavirus outbreak has escalated, leading to unprecedented economic impacts which are creating more uncertainty for businesses.

IQumulate was rebranded in March last year after parent company Steadfast bought out joint venture partner Macquarie Bank and took full ownership. Previously called Macquarie Pacific Funding and with a history dating to 2003, it currently works with more than 600 brokers and in excess of 60,000 clients.

The funding firm operates in Australia and New Zealand, and the focus in the first year under the new name and ownership structure has been on bedding-down its strategy and ensuring clients’ needs are being met in the changing environment.

Offering solutions: IQumulate Chief Executive Raj Nanra

Australia’s total premium funded market is estimated at around $6.8 billion, with the offering taken up by businesses of all sizes, and also sometimes for consumer insurance policies. Less than a third of commercial brokered premiums are funded, which Mr Nanra says is relatively low compared with levels in excess of 50% in the UK.

“For me, coming into this industry and looking at Australia as a mature market, I would have thought it would be higher,” he says. “Part of our job is to ensure we raise the level of awareness of what I call a proposition versus a product.”

Benefits of premium funding include the quick and easy arrangement of competitive finance, arrangements that sit separately to existing loan facilities, instalments that may be tax deductible and additional flexibility. Sometimes, of course, it’s a lifeline.

SMEs in particular can face short-term cashflow management strains as they deal with the uneven nature of their revenues. The sector was hard hit by lending restrictions as the credit squeeze took hold during the global financial crisis a decade ago, highlighting the value of having another option for managing financial commitments.

But premium funding is also taken up at the top end of town, with many large companies seeing the benefits of the arrangement.

“The product is not just prevalent in SME-land, it is extremely prevalent in high-end corporate Australia,” says Ross Hayward, the Director of Queensland-based Premium Funding.

“There are listed companies out there that fund their premiums. Essentially it is an off-balance sheet form of finance. There are clients with millions and millions of dollars of premium that will fund their insurance at rates that are absolutely rock bottom.”

For brokers, premium funding provides another way of assisting clients and ensuring they have the right cover in place, and it contributes to their own revenues through commissions.

Insurers are at arm’s-length when it comes to communicating and dealing with the clients as part of the process. Once agreed, the funder pays the insurer upfront.

Payments by the insureds to the funder are mainly under a monthly arrangement, while fortnightly or quarterly options are available and term lengths may vary. Multiple insurance policies can also be paid through the one instalment system.

Funders are sensitive to the rising regulatory focus on customer outcomes and transparency flowing from the Hayne royal commission, and trust is a key element of premium funding arrangements, particularly given the importance of client-broker relationships.

“Brokers get to know how funders treat their clients and there is an incredible amount of trust when a broker recommends a client uses a funder.”

“We try our best to make sure we really help with that relationship,” Mr Hayward says. “Brokers get to know how funders treat their clients and there is an incredible amount of trust when a broker recommends a client uses a funder.”

For premium funding providers, the offering is lowrisk compared to products elsewhere in financial services. Ultimately, if a client fails to make payments the cover can be cancelled and the balance repaid by the insurer to the funder.

Allianz Australia-owned Hunter Premium Funding is the largest provider, while other participants include Bank of Queensland, which acquired Centrepoint Alliance Premium Funding in late 2016.

Mr Hayward says there has been some consolidation in the industry over the years, but it is a sector unlikely to draw a rush of new entrants.

“The margins are very tight and that is just the nature of the secure product,” Mr Hayward says. “The big end of town is incredibly cheap, so you have ended up with six or seven funders that now do big volumes/high turnover.

“It wouldn’t be easy to be a start-up premium funder. To make it worthwhile you need some big volumes because the margins are so low.”

Factors influencing uptake include ease of purchase, the degree to which it is promoted as well as business and economic conditions.

A hardening market could play into demand for funding, with rates in some classes and geographies recently rising strongly, including liability and higher-risk commercial property, as corrective actions have been taken by insurers following an extended period of weaker conditions.

Some clients will simply always prefer to pay upfront if possible, while research suggests that most companies which have adopted premium funding once will probably continue with the arrangement for at least the next few years.

The level to which brokers highlight premium funding to their clients varies, but technological changes have facilitated the process, reducing the paperwork and making it more visible. That trend is expected to continue as systems further improve.

“Fortunately, a lot of the brokers now have a lot more automation around funding and it is offered on the bottom of invoices in a majority of cases, so it is there as an option,” Mr Hayward says.

Buying trends across many different services at the smaller end of the market, particularly given the digital transformation of payment systems, are also filtering upward and will potentially have a greater impact, especially in the case of SMEs.

“It has just become so common that everyone is paying by the month on home and car and even life insurance,” Mr Hayward says. “The domestic direct-to-consumer insurers are probably assisting us because of the fact that it is so normal that everything is paid monthly these days.”

A survey by Premium Funding a few years ago, sent to a cross-section of brokers, found manufacturing, construction and retail were the top industries using funding arrangements. That was followed by accommodation and food, transport, and property.

Looking ahead, business conditions across the economy are particularly difficult to forecast in the current environment, but decisions around cashflow are likely to be even more critical.

Firms will be considering their investment priorities, financial obligations and required levels of insurance cover, and premium funders will have an important part to play.