This is a follow-up to a previous blog about premium finance. For additional information, please reference the first blog: 3 Problems with Involving Your Wholesaler in Premium Financing (and How to Solve Them).
There are many reasons why you might not want to involve your wholesaler in premium financing arrangements. In a previous article, we discussed some of these issues, highlighting how introducing a wholesaler in premium finance can lead to three problems:
- Adds confusion for your own agency about how much the wholesaler has been paid for the policy.
- Can create delayed payments to carriers.
- Increases the risk of your wholesaler accidentally sharing sensitive information about your insured to potentially dubious actors.
That article also raised questions surrounding certain practices by premium finance companies that merit further examination and explanation. To aid in our exploration, I called on a long-time industry contact (who we’ll reference as Robert for this article) who’s been in the premium finance business for over 25 years and has dealt with retail agents and wholesalers alike throughout his career. I wanted his thoughts on these issues, so we sat down to chat about this topic.
Issue #1 – Vetting Retail Agencies for Premium Finance.
“Why would a premium finance company choose to send funds to a wholesaler they have no direct relationship with rather than sending those funds to the retail agency?”
1. Establishing Credibility in New Relationships
Robert noted that premium finance companies typically vet new retail relationships before issuing premium financing funds to those new relationships. In the vetting process, the finance company looks at the size, longevity, carrier appointments (companies and wholesalers) and overall reputation of the agency. But, if the agency is small or brand new, it may be difficult for the finance company to validate any of those criteria well, at least initially. One way to shorten their vetting process while bypassing any uncertainty about the agency’s credibility, is to send funds to the carrier or wholesaler rather than to the agency itself for a trial period.
Robert further noted that finance companies assume that the carrier and wholesale brokerage are more established entities, so they prefer to send funds there. A finance company needs to experience the flow of business with that new retail agency for a time to make sure that carriers are paid in a timely fashion. It may take a few months before the retail agency establishes the level of credibility and comfort needed for the premium finance company to fund a retail agent directly.
This is understandable, but it also assumes that any wholesaler involved in the placement agrees to the accommodation. Even if a wholesaler agrees, this practice increases the three risks we mentioned above.
2. Lack of Accounting Sophistication.
Some smaller retail agencies may lack an in-house bookkeeper or accountant, and/or lack a system to easily monitor all the moving parts of their clients’ premium financing and payments. When lacking a more sophisticated accounting system, these retailers may negotiate to outsource as much of the premium financing details to their wholesaler instead. Again, asking the wholesaler to get involved raises the three risks.
Understandably, the premium finance company’s perspective is about protecting their interests first. Although there’s nothing inherently wrong with that, you should still be aware of the drawbacks. Namely, that they’d seemingly place their trust in a wholesaler they don’t know before they’d trust the relationship you’re building with them.
Issue #2 – Verifying Bound Policy Information.
“Why do premium finance companies call the wholesaler to verify detailed data about a retailer’s bound policy?”
“Trust, but verify”
This adage can be sage advice in the financing world. Essentially, premium finance companies need a quick and simple verification that the policy they are financing has, in fact, been bound by the retail agent with a viable carrier. Referencing the previous article, Robert agreed that “While finalizing the contract with your finance company, you can simply provide them with a copy of the binder document which contains all the same information that they need to verify.”
He confirmed that this can be a simple and easy way to meet the finance company’s verification process and requirements. Yet this doesn’t happen often enough. A finance company may be more willing to place their trust in an established carrier or wholesale brokerage, so they’re quick to reach out to the wholesaler involved. He also suspects that many retailers simply don’t think to provide the binder to their finance company quickly enough. Which leads to his next point…
Premium Finance is a Highly Competitive Industry.
Robert pointed out that the industry has been highly competitive for decades and that ease of doing business is key. It’s understandable that the harder the process is for a retailer to get the policy financed, the less likely that the retailer will continue using the same finance company. So, it appears that some minimal verification processes are put in place initially without considering the position that the wholesaler gets put into later, which can lead to more confusion and potential loss of your insured’s policy data.
Again, we accept that premium finance companies are working as quickly as possible to put financing deals together. The irony is that time can be saved, and information easily verified by simply asking you, the retail agent, for a copy of the binder up front. If that doesn’t happen, they’ll seek verified information from us, and we’ll turn back to you for it anyway! That way we won’t accidentally share you or your insured’s sensitive data, while simultaneously keeping you in control of the discussion with your premium finance company.
Keep It Simple
Whatever the reason a premium finance company tries to work directly with your wholesaler, it doesn’t change that it may create delays and potential issues for you down the road. Issues that take time and effort to solve. Issues that potentially create tension between you and your clients. As my contact highlighted throughout our conversation, there are plenty of instances where it is beneficial for the finance company to involve the wholesaler, however, one can’t help but notice that most of the reasons presented are not to the benefit of you, the retail agent.
However, what Robert and I could both agree on is that the best way to avoid issues for all parties involved is to keep it simple and provide the binder up front.
