Premium financing for pure captives

The pure captives industry has seen explosive growth over the past 30 years—the number of pure captives has grown at a rate of 600 percent and continues to soar. Incorporating premium financing into the process has the ability to fuel even more growth by offering clients the option to pay their premium over time instead of payment in full at the inception of the policy term.

Premium financing is also a viable tool that assists captive managers in providing an even more robust offering to their clients. As premiums continue to rise, a premium finance solution can help your client maintain more liquidity throughout the policy year.

What is premium finance?

Premium finance has been in existence for over 50 years. It has been mainly used in life and property and casualty insurance transactions but is starting to get some traction in the pure and group captive insurance 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. This allows the insured 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 typical policy term is 12 months for most premium finance loans. However, the policy term can vary from policy to policy.

How would premium financing apply to a pure captive?

When explaining the benefits of a pure captive, it is usually fairly easy for captive managers to demonstrate why it is so beneficial to the client. In short, it allows the client to have more control over sometimes substantial premiums and fees that would normally be paid on a traditional policy.

However, the client may still have reservations largely due to the impact that paying the full annual premium might have on the client’s cash flow. Premium financing solves this issue by providing a low impact loan arrangement at a reasonable cost which allows the client to use the funds for other normal expenditures that manifest during the normal course of business.

Another benefit of premium financing is that it is an off-balance sheet loan that does not require credit reporting. If the client has a line of credit, they can save it for unforeseen circumstances or emergency contingencies.

Five benefits of premium financing for pure captives

1. Improved cash flow: 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 require credit checks. The agreement will 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 rate, the APR is based on the size of the loan and can usually be below prime rate.
4. Potential tax benefit: the client should be able to deduct the full expense of the premium in the current year without having to outlay the full premium payment.
5. Increased usability: premium finance provides a flexible, low-cost option that will allow prospective clients that are on the fence to move forward.

Dan Duncan is the founder and chief executive officer of MW Premium Finance Corp. He can be contacted at:  dan@financepremium.com