Summary
Banks seeking new revenue streams and loan growth should look closely at the property and casualty (P&C) insurance premium finance market. Insurance premium financing (IPF)— the practice of extending short-term credit to policyholders so they can pay annual premiums in installments — represents a $40 billion annual market in the United States alone, with charge-off rates typically below 30 basis points. Because the loan is collateralized by the policy's unearned premium reserve, credit risk in uniquely self-liquidating. This blog explains how banks and bank-owned insurance operations can enter or expand in this market, what the key product characteristics and risk mitigants look like, and how Input 1 has supported financial institutions in this space for over 40 years.
The Market
Banking and Insurance Coming Together
As the line between banking and insurance continues to fade, the benefit of leveraging both markets becomes clear. Insurance premium financing (IPF) is a primary example. Most insurance products are financed and the market for financing insurance paper is significant. When one considers the importance of having commercial insurance in force, it is easy to understand the low default rates. Net interest margins are also higher than many other asset types.
Furthermore, banking entities that own insurance operations (brokerages or carriers) have an incredible opportunity to capture extra revenue. In these cases, the bank-owned insurance entity is producing a product that often requires financing. If the insurance entity isn’t providing the financing, someone else will – and potential revenue is lost. Cross-selling further enhances the opportunity.
Proof of this concept is everywhere. Most automobile manufacturers own and promote their own financing arm. Virtually every major gasoline company offers a branded credit card. Many other industries are following suit.
Convert Challenge into Opportunity
The challenge, of course, lies within the stringent requirements and unique compliance issues faced by banks, when compared to non-bank-owned insurance concerns. Input 1 converts these challenges into opportunities by providing a comprehensive solution for bank-owned IPF operations. Bank-owned insurance financing operations throughout North America have relied on Input 1's software and services for over 40 years – making us the most experienced partner in this space.
Our approach is highly detailed and analytical. We assist our clients in establishing new or refining existing IPF operations with policies and procedures that pass the scrutiny of federal and state regulators. This ensures bank assets perform and retain their value.
Input 1 is the only premium finance loan servicer and software developer selected by financial leaders such as G.E. Capital, J.P. Morgan Chase, Wells Fargo Bank, ING Capital, M&T Bank, Mizuho Bank, DZ Bank, Wintrust Financial Corp and BB&T to support their premium finance lending activities. If your bank owns a brokerage or insurance carrier operation, or if your bank is simply looking for an asset type with highly favorable profitability and risk characteristics, you could benefit from the superior programs, service, and technology that Input 1 has to offer.
Overview
Insurance premium financing is the business of extending credit to a policyholder to pay for premiums when the insurance carrier requires payment in full at inception of coverage. Premiums are advanced either directly to the insurance carrier or through an intermediary (i.e. insurance broker) and repaid by the policyholder, with interest, during the policy term. By contract and statute, the finance company secures the right to cancel the insurance upon default and establishes a first position lien on the unearned premium of the policy.
Commercial Insurance Premium Finance Opportunity
- Global Market Size of approximately $55 Billion in annual originations
- The United States market represents approximately $40 Billion in annual originations
- Net Interest Spread of approx. 4.50%
- Variable loan sizes ($1,000.00 - $5 Million+), fee income and growth opportunities
- Very low credit losses driven by the collateral of “unearned premium”
Considerable Growth Opportunity to Banks
- Bank-owned insurance subsidiaries finance significant insurance premium through unaffiliated premium finance companies each year.
- Banks that do not have a captive insurance subsidiary have opportunities to finance the insurance purchases for their customers and even greater opportunities with their retail agency customers
Premium Finance Characteristics & Benefits
Insurance premium finance provides valuable benefits to customers and the retail broker.
Product Attributes
Examples & Features
- Terms commonly less than 12 months, e.g., 9 or 10 installments
- High renewal rates
- Full premiums are paid up front to the insurance carrier
- Return of unearned premium must come to premium finance company on default
- Collateralized by the unearned premium reserve on the insurance policy
Product Benefits
Customer & Insured
- Minimize depletion of cash resources
- More effectively match spending to insurance coverage benefits
- Pay multiple policies with one invoice
Product Benefits
Retail Broker
- Provide an attractive payment plan for policyholders
- Earn placement fees for arranging financing
- Earn commission dollars up front instead of over time
Why This Product is Attractive to Banks
Area of Interest
Premium Finance
Loan Growth
- Loan averages can range anywhere from $1,000 to more than $5,000,000
- High customer renewal rates (75%+)
Fee Income
- Loan setup fees
- Substantial late fee income
- Other fees
Low Losses
- The insurance policy serves as cash/collateral for the finance company
- Commercial loan delinquency rates are low
- Charge-offs in the sub-30 basis point range
Market Size
- U.S. Market size of $40B+ in annual originations
- Potential market size of $500B+ (includes entire market, non-financed, and installment billed)
Customer
- The customer requests to finance their insurance policy(s)
Retail Broker
- Upon receipt of an approved insurance quote from the carrier, the retail broker produces a premium finance application for the insured
Premium Finance Company
- Underwrites the loan application
- Provides all notification to parties involved in order to establish an interest in the policy premium
- Advances the premium proceeds to the insurance carrier or its authorized agent
Insurance Carrier
- Receives the annual premium proceeds and acknowledges the premium finance company interest in the policy
- Cancels the policy and refunds unearned premium at request of finance company
Collateral
Description
What makes IPF uniquely attractive as a bank asset is the self-liquidating nature of its collateral. Unlike real estate or equipment loans where collateral recovery can take months and involve litigation, the unearned premium on an insurance policy is a liquid, contractual obligation. If a borrower defaults, the premium finance company notifies the carrier, the policy is cancelled, and the carrier is legally required to return the unearned portion directly to the lender — often within days. The table below illustrates how collateral coverage actually increases as the loan amortizes.
Risk & Mitigation
There are three primary areas of risk for a premium finance company.
Risk: Operating Control
Mitigation
- Using an experienced third-party administrator, and/or a proven software system designed to manage this asset type, will help banks maintain control on the operational aspects of this business, including: underwriting, terms, rates, procedures, collection, notifications, etc.
Risk: Carrier Insolvency
Mitigation
- Frequently monitor insurance carrier concentrations
- Maintaining a floor for acceptable insurance carriers with which to do business (i.e. must be A.M. Best Rated B+ V or better)
Risk: Agent Fraud
Mitigation
- Implement a comprehensive due diligence process for agents
- Limit the number of retail brokers who will receive funds directly
- Develop proper fraud-prevention strategies to monitor agent transactions
Written By: Todd Greenbaum and Chris Farfaras
FAQs
Insurance premium financing (IPF) is the practice of extending short-term credit to a commercial insurance policyholder so they can pay their annual premium in monthly installments rather than a lump sum upfront. The lender — in this case, a bank or bank-owned finance company — advances the full premium to the insurance carrier or broker, and the policyholder repays the loan with interest over the policy term (typically 9–10 months). The loan is secured by the policy's "unearned premium" — the unused portion of the premium that the carrier must legally refund if the policy is cancelled. This makes IPF a self-liquidating, highly collateralized asset class that is particularly well-suited to banks' risk profiles.
The U.S. insurance premium finance market generates approximately $40 billion in annual originations, with the global market estimated at around $55 billion. The total addressable market — including premiums that are currently billed in installments directly by carriers or are not financed at all — is estimated at more than $500 billion. This means banks entering or expanding in IPF have substantial room for organic growth without displacing existing competitors.
Insurance premium finance loans carry three primary risks: (1) operating control risk, managed by using proven IPF software or a third-party administrator experienced in underwriting, collections, and regulatory compliance; (2) insurance carrier insolvency risk, mitigated by monitoring carrier concentration and requiring a minimum A.M. Best rating of B+ V; and (3) agent fraud risk, addressed through comprehensive agent due diligence, limiting the number of brokers who receive direct disbursements, and fraud-monitoring protocols. Because the unearned premium serves as cash-equivalent collateral, commercial charge-off rates in IPF are typically in the sub-30 basis point range — well below most other commercial loan categories.
Yes. While banks that own insurance subsidiaries have an immediate pipeline of insurable customers and can capture premium finance revenue that would otherwise go to a competitor, banks without insurance operations can still participate in the IPF market. They can finance the insurance purchases of their existing commercial banking customers, partner with retail insurance agencies whose policyholders need payment plans, or establish a standalone premium finance division. Input 1's Premium Finance as a Service solution is specifically designed to help banks launch or scale these operations without needing to build proprietary infrastructure from scratch.
Input 1 provides both the technology and the operational expertise banks need to run a compliant IPF program. On the technology side, Input 1's Premium Billing System (PBS) automates underwriting, loan servicing, collections, and policyholder notifications. On the advisory side, Input 1 assists clients in developing policies and procedures designed to satisfy federal and state regulatory scrutiny — a critical requirement for bank-owned finance operations that face stricter compliance standards than non-bank lenders. Input 1 has served financial institutions including G.E. Capital, J.P. Morgan Chase, Wells Fargo, ING Capital, M&T Bank, Mizuho Bank, DZ Bank, Wintrust Financial, and BB&T, making it the most experienced premium finance technology and services partner for banks in North America.
