Premium finance is no different from regular financing in that there is always some risk. This not a problem unless there is a lack of understanding. After all, it is important to remember there are risks when a client does not buy the insurance they need. So the issue is less about whether there is risk, and more about how much risk and how much reward. If any agent tells you that the program is “free insurance or risk-free,” they are clearly very misinformed or overly optimistic in their selling approach.
Premium Finance Risks: Design Design
Premium finance is a specialist skill set and most designs NIW Companies sees are not done by experts.
Questions to ask:
- Does the design last to age 100+ and still save money?
- Does the design have realistic assumptions? (Look at the underlying interest rate assumption on both the lender loan and the policy return)
- Is there any meaningful testing to ensure the design will not fail? (Please note: The historical average for LIBOR is 4.6%. The bank will add a profit margin onto the LIBOR rate. Make sure the loan breaks out interest rate assumptions and bank profit margin. Also, confirm that the interest rate forecast is based on a credible source and not purely hypothetical.)
Being realistic, assume that economic conditions will not remain constant throughout the term of the policy. Look for stress tests that show how the design would perform during an economic downturn. The design should account for economic uncertainty, although most premium finance designs do not. NIW conducts stress testing on all designs.
If a client cannot tolerate the additional collateral or interest requirements needed to recover through harsh economic circumstances, then the design should be modified in a manner that is acceptable to the client’s needs. They can only make this determination if they are shown stress tests.
One cannot advise on a complex issue without experience. Has the agent done this before or is working with a group that has? Is there servicing support? Ask for examples of the above.
Is there only one source of supply for lending or multiple? Many smaller lenders frequently have limits on their lending capacity and may not opt to remain
If you have other concerns about the risks associated with premium financing , contact us with your questions.