Pros, Cons of Outsourcing a CPF vs. Running In House
This is the second in a three-part series on captive premium financing. Part Three will run in the Sept. 8 issue of Insurance Journal.
Agents and managing general agents interested in the setup and formation of a captive premium finance company must eventually make a critical choice in running their business: Outsourcing their business to a third party for all of their servicing needs or licensing the software them selves and running the entire operation in house. The business philosophy and future goals of the agency will have a great influence on this decision. Agents need to openly consider each option before making their choice.
The choice to outsource
Outsourcing or “sourcing” is not unfamiliar territory for the insurance industry. Functions that are outsourced are areas not core to the expertise of a business. For example, insurance carriers routinely outsource policy administration and billing so they can concentrate on pricing the risk and investing the premium dollars—their core competency.
Since financing premiums is not typically a core competency of an insurance agent it is a good candidate for outsourcing. When set up properly, a wholly owned and outsourced finance company is treated identically to a third party finance company. Your staff will interface with your “virtual service center” (i.e. your outsourcing partner) who will run your business using underwriting and servicing standards that you set.
The framework of the business must start with a concise and detailed set of workflow procedures established by you and your outsourcing partner. These procedures should be determined by you but with your partner’s guidance and experience. A proper workflow process takes time to build and is constantly amended. The concept of establishing a workflow for a business sounds routine, but many new owners make the mistake of rushing into a business they know very little about and this leads to problems. This document is one of the keys to your overall success.
We have discussed, abstractly, the concept of “procedures” so now let’s quantify this. At a minimum here are some specific areas that should be provided by your outsourcing partner:
A management-level discussion between you and the outsourcing partner should take place no less than monthly for the first six to 12 months. Many processes that you have established along the way should be carefully reviewed within the first few months to ensure they meet with your objectives.
Last but not least, your partner should provide you with abundant management level reporting so that you can evaluate the results of your finance company. It’s important to note that if you establish a line of credit with a lender they will have very specific reporting requirements. Make sure that you know what those requirements are up front and be certain that your partner can deliver.
The outsourcing advantage
Vendor expertise—The outsourcing partner has years of experience in providing this type of service to the industry. The partner can help you get started quickly and can offer you sound consultative ideas on how to run your business.
No staffing concerns—When you outsource, you don’t need to staff up. Your partner bears the overhead of maintaining a trained staff to run the business.
Variable costs—Your outsourcing partner should charge you a per loan administration fee each month for the production you generate. This way you only pay for the loans you generate rather then a fixed monthly fee.
No equipment needed—Outsourcing should mean no additional computers or office equipment of any kind. Your outsourcing partner should provide the technology you need to interface with and manage your finance company.
Technology—The right outsourcing partner should be able to offer you myriad other services to choose from, including Internet-based quoting, account status and convenient online payment options that will enhance the experience your policyholders will have when doing business with your companies.
The choice to run it yourself
For a number of agency owners, the thought of outsourcing all or a piece of their organization is simply not an option. Maybe your business philosophy is to handle everything in house under one roof with your employees. Maybe you are just a control freak. If this is the case, it’s good to know that bringing this process in house is not as difficult as it may seem. An executive level commitment is required by the agency principal to hire and maintain a staff to run your finance company. Depending on the volume of loans generated by your finance company this can be a part-time, one person shop or a five to 10 person staff dedicated to just your finance company.
An agency financing 100 contracts a month, for instance, would process five loans per day on average. One staff member using a software package should be able to quote, enter and process the entire loan in as little as 10 minutes. This comes to less then one hour a day. You also must consider the time needed to handle the customer service, payment processing, mailing, collections, accounting, banking and other day to day tasks. For the example above, this should not add up to more than two to three additional hours per day.
With the right clientele and the right pricing (i.e., interest charges on the premium finance loans) it is quite conceivable to earn back your software investment in as little as six to nine months.
One critical but often overlooked area in purchasing software is the technical support you will receive. The vendor should have well-trained technical support staff that you can rely on. Does the vendor offer 24-hour emergency support? Does the vendor provide you with on-site training? An experienced trainer/ technician will be invaluable in helping you get off on the right foot. Nothing will frustrate you and your staff more then installing a complex piece of software without the hands-on guidance of professionals that use it.
Our recommendation is to test and play with the software for a couple of weeks before going live. This will give you ample opportunity to quote, enter contracts and payments, print notices and reports and get comfortable with the new system. Once you decide to go live, the system can be flushed clean by the vendor and you can start quoting and booking real transactions.
The software license advantage
Control—If you need to touch and feel the operation and have it solely under your control then this is the single most important factor in choosing to run the business yourself.
Overhead expenses are already in place—Depending on the type and volume of business, you may be able to absorb the staffing requirements of the finance company into your existing overhead. If you already have available resources to deploy towards this process then additional expenses could be negligible.
Vendor evaluation
Make it a point to thoroughly research each vendor. Look for a track record of good relationships that can be proven by the vendor’s existing clients. Ask for five referrals. It’s not hard to make one or two customers happy so unless you speak to four or five you won’t know enough about a vendor to make an informed decision. Once you get the referral list, you can decide how many calls to make. Finally, unless it is cost prohibitive, ask to visit their site so you can meet their management team and see their service center and their software, in action and in person, before making a decision.
The third and final part of this series on captive premium financing will cover in detail the pitfalls one can avoid when starting and running a premium finance company.