June 10, 2015 Articles

Determining Insurance Premium Finance Company's Potential Preference Exposure

Timing is everything.

By Howard A. Cohen

The insurance premium finance industry has been around for more than 50 years, and billions in premiums are financed each year. At its core, premium financing enables a business to prepay its insurance premiums in full at the inception of the coverage, without having to expend large amounts of cash immediately. In a typical premium finance transaction, the insured pays down 15 percent to 20 percent of the total premiums due. The remaining balance is then advanced by the premium finance company to the insurance carrier or agent. To secure repayment of the loan made by the insurance premium finance company, the insured assigns to the premium finance company all unearned and return premiums that are available upon reduction or cancellation of the financed policies. Although the premiums are prepaid at inception of the loan, the insurer typically earns its premiums on a pro rata basis, earning 1/365 of its premium for each day it extends coverage. Accordingly, at the time of loan inception, the entire amount of the prepaid premiums is unearned by the insurance company. The amount of return premium, however, decreases each day that the insurance coverage remains in place as the insurer gradually earns the premium. To the extent the coverage is canceled, the insurance company is required either by statute or contract to refund any unearned or return premium.

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