Why We’re Excited about Insurance Premium Finance (2024)

We’ve spent the last few weeks diving into Insurance Premium Finance, essentially a buy now, pay later option for insurance. It’s a $60B+ annual revenue industry in the US that has been dominated by banks for the past few decades. Our takeaway: this is an area that feels ripe for disruption across product innovation, billing and payments, distribution, and data reconciliation. Here we’ll dig deeper into what premium finance is, what the market looks like today, growth opportunities, and what we’re excited about in commercial P&C premium finance.

Insurance premium finance is a financial transaction where a third-party provides funds to an individual or business to cover the cost of insurance premiums. Rather than covering the entire premium payment upfront, the policyholder finances the cost of insurance coverage over time in installments. The concept began in the early 1900s when life insurers offered installment plans for policyholders who couldn’t pay the entire premium upfront.

Rising premium costs and institutionalization of capital markets in the 1970s fueled a formalization of premium finance. In 1983, First Insurance Funding (FIRST) was founded in Chicago to expand premium finance to consumers and business owners. Regulatory changes defined by the FTC and the National Association of Insurance Commissioners (NAIC) in the mid-80’s created product and pricing standards that paved the way for the industry to blossom, leading to the rise of new entrants including Allied Premium Finance, IFCO, and American Premium Finance.

In premium finance, customers can be individual consumers or small and medium-sized businesses (SMBs). For individuals, that means financing premium payments for with high cash value life insurance policies. For SMBs, it means financing annual insurance premiums over eight to ten months rather than in a single upfront payment. In both cases, the product is typically distributed through agents/brokers and direct marketing from premium finance companies.

The primary role of insurance premium finance is to help policyholders spread out the cost of their insurance over time. This can be especially impactful for insurance coverages with significant annual costs, which is growing in prevalence in commercial P&C. Premiums have grown at a 5.3% CAGR from 2011–2021, adding additional expenses that cut into profitability and prohibit access to optimal insurance coverage. Furthermore, most insurance carriers don’t accept premium payments in installments. Left to their own devices, SMBs often have no choice but to incur the entirety of the cost at the start of the year.

Why We’re Excited about Insurance Premium Finance (2)

Source: Colonnade Advisors

Commercial lines premium finance is a $45B industry in the US, representing just over 10% of total commercial premiums. In other words, roughly one in every ten policyholders is financing their insurance premiums. The past few years have seen consistent growth, with commercial premiums surpassing personal lines premiums in 2021 for the first time in 10 years. Commercial premium are projected to exceed $600B in the US in the next decade.

For SMBs, the catalyst for premium finance is usually cash flow challenges and mismatches. Facing a challenging macro environment, a common concern from the vast majority of small businesses is over liquidity and access to capital. There’s undoubtedly an opportunity to expand premium finance offerings to a larger portion of commercial policyholders.

Why We’re Excited about Insurance Premium Finance (3)

Source: APCIA

Amid macro headwinds and the “hard market” in insurance that has persisted over the past few years, rising claims, falling investment income, heightened regulation, and weather-related incidents have posed challenges in the commercial P&C market. That said, there is a counter-cyclical nature to premium finance. Many of the attributes of a hard market exacerbate the demand for premium finance as cash flow and liquidity become paramount concerns for small businesses.

Legacy premium finance companies and regional banks helped to pioneer this market in the late 1980s. They have continued to grow their market share over the past few decades, mostly through consolidation. When you start looking at the underlying economics, you start to understand why banks and specialty finance companies are holding on tight. This is an attractive credit asset class: short durations, high yields, strong credit quality with historically low loss rates below 1%. On top of that, it’s a secured lending product in the sense that loans are backed by premiums from underlying insurance policies and a sizable down payment of 10–25% premiums. As a result, much of the volume is dominated by deposit-funded banks and specialty finance companies.

Why We’re Excited about Insurance Premium Finance (4)

Source: Moody’s

The advantages that incumbents have are cost of capital (deposits and access to securitization markets), distribution (tenured broker relationships), and market share (bank-led consolidation has amounted to ~60% of the market). At the upper end of the market, much like other parts of financial services, current incentives make the segment difficult to unseat. Relationships matter, and those between premium finance companies and insurance brokers are tightly aligned and reinforced through relationships (i.e. golf), agency commission splits, and renewing existing contracts.

Incumbents are far less focused on the fragmented long tail of the market. Smaller insurance agencies operating through an agency bill model, where insurance agents are responsible for collecting premium payments and paying MGAs or carriers, offers opportunities to democratize the premium finance to SMB customers who are historically overlooked.

Why We’re Excited about Insurance Premium Finance (5)

Source: Colonnade Advisors

To an early stage investor, it feels like a market ripe for disruption with the presence of legacy banks and specialty finance companies with little in the way of modern technology, AP/AR automation, payments processing, or data integrations. Add to that the complex back end payments, reporting, and reconciliation that lives in siloed spreadsheets and agency management systems (AMS). We believe there are a number of industry characteristics that present interesting opportunities for product, payments, and distribution innovation.

We believe there is opportunity to broaden access to premium finance for small businesses of all shapes and sizes. We’re most excited about the models attacking it with a focus on back office optimization, payments orchestration, and data automation combined with premium financing offerings.

Competing with a credit-first approach is not the right strategy given the cost of capital advantage held by incumbents. However, there are a number of opportunities to expand the ecosystem and build back office software and payments products with premium finance as a core value proposition. Companies like Ascend and Functional Finance have focused on software and payments alongside premium finance, and expanding distribution in a more fragmented sections of the market (smaller agencies and MGAs, respectively). Taking it one step further, integrating a vertical neobank product and for insurance agents and MGAs that’s tied to premium finance and payments offerings feels like a large opportunity that we want to explore further.

As investors in a number of software-led lending businesses, we’re excited about the software-led applications in premium finance to improve agency efficiency, enhance coverage availability for SMBs, and to create industry-specific products in markets with unique needs and dynamic coverages such as e-commerce, gaming, cannabis, and other dynamic industries. We’re also excited about pay-as-you-go pricing models where policyholders can tailor their insurance coverage based on the dynamic facets of their business, as opposed to a static view determined at the end of the year.

As a hybrid fund, we invest credit and equity together in technology companies with a capital intensive element. If you are building or thinking about opportunities at the intersection of insurance, payments and premium finance, we’d love to meet you. Feel free to reach out to me at Conor@upper90.io.

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Why We’re Excited about Insurance Premium Finance (2024)


Why We’re Excited about Insurance Premium Finance? ›

Insurance premium finance provides short-duration assets, low credit losses, great loan spreads, consistent fee income, high growth, and diversification in terms of assets and earnings.

What are the benefits of premium finance? ›

In simple terms, premium finance is a way to spread the cost of insurance, enabling premiums to be paid by monthly instalment, rather than a single up-front payment. A specialist lender provides the funds to pay premiums up front, then collects regular monthly payments plus interest.

Why is insurance premium important? ›

An insurance premium is the sum of money you pay—every month, three months, six months or year—to maintain coverage of your car, your home, your life or other things that can be insured. In short, insurance premiums are money you pay for a policy to help offer financial protection.

What is insurance premium finance? ›

"Insurance premium finance agreement" means a promissory note or other written agreement by which an insured promises or agrees to pay to, or to the order of, an insurance premium finance company the amount advanced or to be advanced under the agreement to an insurer or to an insurance agent, in payment of premiums on ...

What are the risks of premium financing life insurance? ›

Life Insurance Premium Financing risks to consider:

There are risks inherent in any borrowing strategy. These include interest rate fluctuation, market volatility and the possibility of collateral shortfall, which may lead to a margin call.

What are the benefits of insurance premium funding? ›

Premium funding gives businesses the ability to pay their insurance premiums in regular instalments, rather than in one large lump sum payment. That means more cash flow, more flexibility, and in turn, more opportunity.

What is the benefit of financing? ›

What are the benefits of financing? Both consumers and businesses benefit from financing programs, because financing gives customers more buying power and flexibility, and it helps businesses boost sales and improve cash flow.

What is insurance premium in simple words? ›

What Is an Insurance Premium? An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance.

What are the key benefits of insurance? ›

Insurance is a financial safety net, helping you and your loved ones recover after something bad happens — such as a fire, theft, lawsuit or car accident. When you purchase insurance, you'll receive an insurance policy, which is a legal contract between you and your insurance provider.

What is the function of insurance premium? ›

The insurance premium is what insurance companies make use of when it comes to ensuring coverage for all liabilities linked to the policy. The premium may also be invested by the insurance company in securities for earning returns and covering some of the costs tied to the coverage.

How does insurance finance work? ›

Instead of the policyholder paying cash upfront for an insurance policy, they take out a loan, usually through a third-party company known as a premium finance company. The premium finance company pays the insurance premium and the policyholder pays the loan back with interest.

What are examples of premium in finance? ›

Premium can mean a number of things in finance—including the cost to buy an insurance policy or an option. Premium is also the price of a bond or other security above its issuance price or intrinsic value. A bond might trade at a premium because its interest rate is higher than the current market interest rates.

What is the process of premium financing? ›

Premium financing is an insurance funding arrangement where a policy holder borrows funds from a financial institution (usually a bank) to pay for the premium of a new insurance policy, and in doing so, assigns part or all of the rights under the insurance policy to the financial institution as collateral.

What are 3 factors that may affect your life insurance premium? ›

Your age, sex, smoking status and overall health come into play and have an impact on your premiums. While it's important that your premium fits within your budget, there are other things you should consider as well.

What is the interest rate for premium financing? ›

Personal loan vs insurance premium financing

If we compare personal loans and insurance premium financing, premium financing might be a better option than personal loans. “Typically, the interest rates for insurance premium financing range from 8% to 15%.

What factor affects insurance premiums the most? ›

Common factors include:
  • Driving record. ...
  • Garaging of the vehicle. ...
  • Gender and age of drivers. ...
  • Marital status. ...
  • Prior insurance coverage. ...
  • Miles driven and use of vehicle. ...
  • Make and Model of vehicle. ...
  • Licensed drivers in your household.

What are premium benefits? ›

Premium benefit means if any benefit, such as paid time off or compensatory time, due to an employee for an equivalent period of work performed during the regular work schedule of the employee.

What are the benefits of level premiums? ›

Level premiums
  • Your premiums will stay at the applicable rate based on your age when you took out or added that cover portion to your policy. ...
  • If you plan to have your policy for 10 years or more, level premiums may be easier to budget for over the life of your policy, because they're usually more predictable.

What are the benefits of return of premium? ›

A return of premium rider provides for a refund of the premiums paid on a term life insurance policy if the policyholder doesn't die during the stated term. This effectively reduces the policyholder's net cost to zero. A policy with a return of premium provision is also referred to as return of premium life insurance.


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