“The ideal time to introduce premium financing is when the captive is being formed.”
Dan Duncan, Agile Premium Finance

How did you get your start in providing premium finance solutions to the captive insurance industry?

Back in 2015, I connected with Hale Stewart through LinkedIn. He reached out to me shortly thereafter and asked me if I could finance a captive insurance company’s premium. I honestly didn’t know what a captive was. After doing some research and reading a piece that was published by Stewart, I was able to gather enough information to get our banking partner on board with a premium finance funding structure for captives.

What is premium financing?

Mainly used as a financial tool in life and property and casualty, premium finance has existed for more than 50 years in insurance transactions. Over the last several years, there has been increased traction with premium financing in the pure and group captive space.

Traditionally, premiums must be paid in full to the insurance carrier at policy inception. Premium financing is, essentially, a loan that is set up by a third-party premium finance lender to advance insurance premiums to the insurance carrier on behalf of the insured. The insured agrees to make monthly, quarterly, or semi-annual payments to the premium finance lender over the period of the policy term.

The loan is collateralised by the policy and if the loan falls into default, the policy is then cancelled and the carrier returns the unearned premium to the premium finance lender. The policy term can vary from policy to policy. However, the typical policy term is 12 months for most premium finance loans.

When should premium financing be introduced to a captive insurance transaction?

The ideal time to introduce premium financing is when the captive is being formed. The captive manager is the ideal party to make that introduction. Incidentally, actuarials, CPAs, TPAs, attorneys and investment advisors are often present when a captive is being formed and they may also suggest premium financing options in the early stages.

An existing captive may also benefit from premium financing. We recently worked with a captive that had paid the premium in full but was looking for a way to increase capital several months later. We were able to set up a frictionless premium finance loan and infuse the cash back to the parent.

How does premium financing help create solutions for captives?

Pure captives

A large commercial real estate company that owned a captive had the full premium due by the end of the year. It was also in the middle of trying to close a sizable commercial real estate transaction before the end of the year, but was struggling with the bank’s requirements to get the real estate loan finalised.

We were able to finance the captive premium with very little down which freed up their cash and allowed the company to proceed with the real estate transaction. Also, we eliminated the need to fulfil the requirements of a bank loan and they were able to preserve the credit capacity with their bank.

Group captives

A risk retention group (RRG) planned on charging its insureds a subscription fee on top of the premium to help increase the company’s surplus. The biggest challenge was that the subscription fee was fully earned and required to be paid in full at the time of bind. This made the down-payment requirement uncompetitive in the marketplace.

We were able to work with the RRG and the regulating state to allow us to finance the subscription fee, making the down-payment terms more feasible for prospective customers.

Captive collateral requirements

A doctor with substantial net worth was looking to form a captive. A challenge was that all his assets were well-performing and he did not want to devalue his portfolio through liquidation. Instead of having to liquidate performing assets to collateralise the captive we were able to set up a loan for the collateral.

We structured the loan using his unencumbered assets without the stringent requirements that come with most loan underwriting. His portfolio continued to perform at a high level and he was able to form his captive without tapping into those resources.

What are the main benefits of premium financing for captives?

  1. Improved cash flow and flexibility particularly during hard cycles of increased rates and diminished commercial capacity: the client no longer has to lay out the entire premium at the inception of the policy.
  2. Low impact: a premium finance agreement is a signature loan that does not have any reporting requirements. A premium finance loan can also provide a low down-payment option and spread out the payments over the course of the policy term.
  3. Competitive cost of loan: even with recent increases in prime interest rate, the APR is based on the size of the loan and a bank’s borrowing basis, which is likely below prime rate.
  4. Potential tax benefit: the client may be able to deduct the full expense of the premium in the current year without having to outlay the full premium payment.
  5. Increased opportunity optimisation: premium finance provides a highly flexible, easy-to-use and low-cost option that will allow prospective clients that are on the fence to move forward.

Dan Duncan is the captive specialist team leader for Agile Premium Finance. He can be contacted at: dan@financepremium.com

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