The Insurance Review - November 2008
PREMIUM FINANCING
By Roland L. Enz - President, California Plus Insurance
The economy continues to disintegrate around us. But our astute leaders, including the two that are running for President, are tackling the problem with the infusion of billions of taxpayer dollars into the system. When Congress first started these talks, it was about buying toxic investments. Now the focus, through arm twisting from the world banking countries, has redirected itself into bailing out the banking industry. I didn’t know that we had that kind of money lying around?
There is talk of a world recession. Yes, we will have a slow down, but rest assured we will pull out of it. The United States of America is a strong and resilient nation, and one of the key components to its economy (and to the recovery of the economy) is the trucking industry. Right now, managing your money should be one of your immediate concerns.
The majority of you, that purchase insurance, finance it through a premium finance company. The major part of the commercial insurance industry runs through this type of financing – and it can cost you plenty. I have prepared a typical scenario here, showing the costs associated with a truck premium financed through a finance company. I am using a premium of $6,837 as the example. The finance fee for this loan is $404.73. If you are late with your payments you will be assessed a late fee of $30.74. Now, if you are continually late, and this loan has nine monthly payments, you will have accumulated late fees of $276.66. Take this and add it to your finance fee and your annual fees for this loan (or premium) are $681.39. That’s about 200 gallons of fuel.
While shopping for your insurance coverages, when the agent gives you a quote, you should ask how much the loan will cost if the premium is financed and if there are any alternatives to financing the premium. Some companies offer a direct bill alternative and, if so, it should be discussed with your insurance agent. If the insurance company offers this type of payment plan you may want to consider it – they usually only charge a small processing fee to handle the monthly payments, which can save you a lot of money over time.
When you finance an insurance premium, the finance company has paid your insurance for you. If you fail to make payments or if you cancel the policy, you have a responsibility to the lender for any costs that are short in the event of termination. If you cancel your policy, make sure that you understand your responsibility in the process, especially with regards to the required 30 day notice from your insurance company to the various government agencies that provide for your authority. It always takes 45 days to cancel a policy if filings are involved. Talk to your insurance agent about your options.
You have heard many news stories regarding the capital infusion into AIG by the Federal Reserve. Much of it, through erroneous news reports by our half-truth news services, is false. The major mistruth was the reporting of AIG executives treating themselves to a $400 million junket at a posh Southern California resort. The facts are that this was planned for independent life insurance agents and not AIG employees. Life insurance sales run on these types of incentives.
The reason that I bring AIG up is that many of you have insurance policies that are written through some of the AIG companies including Granite States Insurance Company, Lexington Insurance Company, New Hampshire Insurance Co. and the Insurance Company of the State of Pennsylvania, to name a few. AIG is a world financial giant and the Federal Reserve’s interest was to keep the company liquid. AIG’s commercial insurance companies remain well capitalized and financially secure. This was never an issue with these companies. The fact is the subsidiaries were prepared to loan the parent $20 billion to help meet its liquidity needs. The action by the Federal Reserve outlines its confidence in AIG’s ability to repay these loans, so if you’re covered by one of their companies, you can relax.
There are many safeguards in the insurance system. Each state regulates those companies that are admitted and that do business within their state. The companies that enter California as admitted carriers, for example, participate in the California Guarantee Program. That program guarantees coverage, to the insured, in the event that the insurance carrier cannot pay claims. That does not pertain to those companies that enter the state as non-admitted insurance companies. Companies entering the state as non-admitted carriers are still screened by the Department of Insurance and should show up on their white paper. It is an important fact that you should be told whether or not your insurance company enters the state as an admitted or non-admitted carrier. Only at that time should you make the decision to purchase.
The term non-admitted is not a derogatory term. Many specialty coverages can only be purchased through a non-admitted carrier. More importantly, you should be concerned with the company’s financial strength. You can always request this information from your agent or you can log onto AM Best’s website for the companies’ most up-to-date financial information. Many insurance companies choose to do business in California as non-admitted carriers. This provides them with more latitude with regards to the rates that they can charge. California is a filed rate state and all companies that are admitted have to file their rates with the Department of Insurance. These filed rates lock in the rates that the companies can charge. Any subsequent rate change has to be approved by the Department of Insurance.
Times are extremely tough, but if you continue to work hard, make good business decisions and have a positive attitude, you will survive. As it has been said before, look after your pennies and the dollars will take care of themselves. If you have any comments or insurance-related questions, I can be contacted through California Plus Insurance Service Inc. in Modesto, California at 1-800-699-7101.