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3 ways to handle insurance premiums when cash is king

Corporate Risk Tools and Technology|Insurance Consulting and Technology
COVID 19 Coronavirus|Insurer Solutions

By Brad Dame | April 29, 2020

As the realities of the COVID-19 pandemic come into focus, these options can help manage insurance spend, free up capital and improve cash flow.

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About our COVID-19 coverage

In our ongoing coverage of the COVID-19 outbreak, experts from across Willis Towers Watson share insight into what you need to know to manage your business and employees and reduce your risk.

As we navigate the uncharted territory brought about by the COVID-19 pandemic, talk is turning to how quickly we can reopen an economy that has been largely shuttered. While there are bright spots – streaming services, for example, or certain grocery chains – most companies are suffering significant business losses.

Despite government bailout packages in the U.S. and elsewhere, major revenue losses are not likely to end in the near term, particularly among midsize and smaller companies without liquid assets and a big cash cushion. If the 2001 recession is any indication, serious cost cutting is inevitable – and property and casualty, and liability insurance will be scrutinized like many other expenses as companies struggle with diminished cash flow.

Faced with a constricted insurance program at a time of great risk is tricky business. To maintain coverage during a cash crunch, many risk managers and finance executives turn to funding options that enable them to avoid writing a single big check when the policy is first put in place. While the impact on cash flow can be significant, it’s important to understand options and to consider which, if any, might work best for your company.

If cash-flow constraints limit your ability to pay the full premium as a lump sum at the beginning of the policy period, there are three options to managing insurance spend:

  1. Carrier-provided installment plans

    Carrier-provided installment plans can be an attractive option because their fees tend to be less than a premium finance or banking fee. However, this alternative isn’t offered by all insurers. Carrier installment plans may also serve as a financial incentive for the insured to acquire policies with terms and conditions that may or may not most closely match their exposures.

  2. Revolving lines of credit

    Tapping into typical revolving lines of credit and obtaining bank loans also can be a feasible option but can come with higher annual percentage rates (APRs). Drawing on a credit line or loan may also drain a source of capital that you may need to hold in reserve as business conditions continue to change.

  3. Premium finance

    Premium finance has a number of appealing features as a means to free up working capital and more closely match repayment schedules to revenue streams as your company recovers from COVID-19’s impact. A form of off-balance-sheet borrowing, it preserves cash and leaves credit lines available for other business needs.

  4. How premium financing works

    Premium financing, typically arranged through insurance agents and brokers, has been used for decades by companies of all shapes and sizes, including Fortune 500 multinationals. It generally involves a down payment of 25% or less, although in some cases, such as directors’ and officers’ policies or mid-term audits, it could be higher. The premium financing company, however, will pay the insurer the full premium up front. This lump sum serves as collateral if the insured is unable to meet the repayment schedule.

    Changes in coverage are easily handled. In my experience, premium financing companies have an overall good record for serving corporate clients effectively and at reasonable cost. There is, however, need for a cautionary note or two:

    • Payment options are dependent on several factors, including client payment history, creditworthiness, the amount financed and minimum earned premiums that may apply. Rates will vary as the Federal Reserve rate changes.

    • If the insured is unable to make payments, the coverage is canceled, and the insured may be responsible for payment if the balance owed is less than the policy’s surrender value.

    • The credit rating of the carrier will affect financing terms. In the unlikely event of the insurer’s insolvency, premium finance companies assume no risk.

    Regulatory compliance

    While conceptually simple, insurance premium finance requires a high degree of regulatory compliance and specialized expertise. Working with reputable providers allows the security of regulatory compliance paired with generally competitive rates.

    As the realities of the COVID-19 pandemic come into focus, any of the three options to managing your insurance spend can help with cash flow and free up capital. While I personally like many features of premium financing, it’s important that you pick the premium funding solution that works best for you.

    Disclaimer

    Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage.

    The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.

Author

North America Head of Panels/DBS

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