A quick summary of premium financing and how it works in Massachusetts
Premium financing is a financial service that some agencies may overlook as a financial tool for collecting insureds’ premiums. An agency’s relationship with a premium finance company can allow the agency to provide more effective payment options for selected insureds. Premium financing allows insureds with policies from several carriers to have one monthly payment.
Premium finance may also provide insureds off-balance sheet financing where excess carriers or program managers require full payment for their policies. The Massachusetts Automobile Insurance Plan (“MAIP”) has an installment billing plan for insureds. However, because of the extremely high late payment fees under this billing plan, premium finance company finance charges may match or better the MAIP’s installment charges considering the limited amount allowed premium finance companies by law for late charges.
1. What is premium financing and how can agents use it
In premium financing, an insured signs a promissory to the agency to pay the premiums for the policies purchased. The promissory note signed by the insured is supplied to the agency by a premium finance company. The signed note contains any policy information, the down payment paid by the insured, the total premium financed, and the monthly payment terms for the insured under the note.
The agency then assigns the note to the premium finance company in exchange for the premiums the insured owes to the agent’s insurer or insurers. The agent pays the insured’s premiums to the carriers and the insured makes payments directly to the premium finance company to pay off the note.
After assigning an insured’s premium finance note without recourse to the premium finance company the agency has no further responsibility to the premium finance company. The premium finance company has the responsibility to collect the payments from the insured and handle any collection problems.
2. What are some of the benefits of premium financing?
Depending on the type of insurance policy or policies involved, an agency can benefit from premium financing because:
- Premium financing companies provide agencies an independent credit facility for insureds without the agency having any volume or minimum quotas to finance.
- The premium finance company’s services are available on an “as‑needed basis.”
- An agency’s credit facility with a premium finance company provides additional capacity in addition to whatever programs the agency may be using for insureds to pay their premiums.
- An agency can finance policies for multiple carriers for an insured on a single premium finance note. As a result, the insured makes one monthly payment and the premium finance company pays the agency the premiums due on each policy for payment to the insurers involved.
- For excess and surplus policies or program manager policies where payment in full is required premium financing allows the agency to avoid carrying a receivable issue with an insured by financing the premium with a premium finance company.
- Premium financing allows an insured to avoid tapping into a credit line or using available cash to pay premiums due.
- The agency has no responsibility for the collection of the premiums financed by the premium finance company.
- The agency, based upon its relationship with the premium finance company has more flexibility with regard to deferring payments for an insured under certain circumstances than they might have with a company billing plan.
- For automobile policies, premium financing offers installment payments to insureds who may not be eligible for installment billing because of a prior non‑payment cancellation on their record.
- For MAIP policies, premium financing may offer insureds an overall-cheaper cost based on the amount financed and an insured’s propensity to pay installments late. The state-regulated fees for late payments, cancellations, and dishonored checks for premium finance companies are limited by law and are up to eighty percent lower than similar fees charged by the MAIP.
3. Premium financing does not have any credit worthiness requirements for insureds
Even though insureds may have cash flow problems or bad credit histories, premium finance companies will still finance their premiums.
Premium finance notes all have a power-of-attorney provision that grants the premium finance company with the right to cancel the insurance contract in the event of non-payment by the insured.
Premium finance notes also provide an assignment to the premium finance company of the insured’s right to cancel the policy and collect any unearned premium from the insurance company.
Since the premium finance company has advanced full payment of the premium to the insurance company, this right to cancel and collect the return premium allows premium finance companies to offer financing to companies and individuals that would otherwise never qualify for a conventional unsecured loan to pay their insurance premiums.
For commercial insureds, premium financing offers the business off-balance sheet financing. Premium financing does not lower their credit availability and allows the businesses to conserve their cash for more productive business purposes.
For individual insureds, who have had their automobile insurance cancelled within two years of their application for coverage, company payment plans may not be available. In that case, such insureds have to pay one-hundred percent of their premium in advance. Premium financing can allow these insureds, notwithstanding their poor credit history, to finance their premiums.
4. The Division of Banks regulates premium finance companies and a state board regulates rates for consumers
The Division of Banks licenses and regulates all premium finance companies in Massachusetts. This Division conducts on-site audits of premium finance companies and enforces all of the provisions of the Massachusetts Premium Finance Act.
The rates charged by premium finance companies for financing personal lines policies are set by a board consisting of the attorney general, the insurance commissioner and the commissioner of banks or his or her designee.
Those personal line policy finance rates have been in force since the 1980’s and provide for a maximum interest rate of 18% on the unpaid balance of a consumer’s premium finance note plus a $16,00 administrative fee. Additionally, the board’s rate ruling limits the late fees chargeable for personal lines policies financed.
The state, however does not regulate premium finance rates for commercial lines policies. Those rates are a matter of contract between the parties to the premium finance agreement.
5. Massachusetts insurance agencies have a statutory right to premium finance insureds’ premiums
In Massachusetts insurance brokers and agents have the statutory right to premium finance. General Laws Chapter 175, §162B, provides that “Insurance agents and brokers may accept payment of insurance premiums in installments to be evidenced by notes or other appropriate instruments running from the insured to the agent or broker…”
Based on this statute, the Legislature set up the statutory licensing of premium finance companies but provided that premium finance companies would only acquire premium finance agreements from agents or brokers or other premium finance companies.
The result of this law is that premium finance agreements in Massachusetts are all made payable to an insurance agent or insurance broker who placed the policy.
The statutory definition of a “premium finance agreement” makes this clear: “a promissory note or other written agreement by which an insured promises or agrees to pay to, or to the order of, an insurance agent or broker the amount advanced or to be advanced under the agreement to an authorized insurer or to an insurance agent or broker in payment of premiums on an insurance contract, together with a charge as authorized and limited by law.” (Emphasis added).
The insured can only sign a premium finance agreement payable to the agent or broker and that agent or broker assigns the insured promissory note to the premium finance company in exchange for the full premium owed by the insured to the insurance company.
Premium finance companies in Massachusetts, as opposed to other states, cannot accept premium finance notes directly from insureds.
6. Premium financing MAIP policies may be cheaper for the insured in the long run
For agencies that have any insureds assigned through the MAIP, premium financing, even at the maximum rates allowed by law, may offer some advantages to insureds in comparison with the MAIP’s installment billing plan.
If insureds have had difficulty in making timely payments or in maintaining sufficient balances in their checking accounts to avoid dishonored checks, premium financing may save the insured money. As the chart below illustrates, the late fees, dishonored check fees, and cancellation fees in the MAIP will cost such insureds significantly more than such costs if premium financing is used. For example, the MAIP, as per the chart below, charges $29.00 for each late payment. The state limits premium finance companies to charging $5.00, or $24.00 less for each late payment.
Premium finance comparison with MAIP plan of 9 installments with $1,000 balance financed
|Type||MAIP’s Schedule||Premium finance legal maximums|
|Dishonored check fee||$29.00||$10.00|
Also, the MAIP’s installment billing plan does not apply to all assigned risk applicants Under the MAIP’s Rule 28(C)(1)(a), any applicants who has been cancelled for nonpayment of premium within the 24-month period must pay the premium in full.
Many of these assigned risk applicants finance their premiums with premium finance companies, such as this checklists’ sponsor, that specialize in financing MAIP policies for assigned risks with cancellation histories.