This article first appeared in Personal Wealth, The Edge Malaysia Weekly on August 10, 2020 - August 16, 2020
When Paul Kuan, CEO of Crowd Sense Sdn Bhd, was working in the banking industry about 16 years ago, he noticed that many companies did not have insurance protection owing to cash flow limitations. This left them exposed to sudden and unexpected events.
A number of them, particularly small and medium enterprises (SME), also could not afford to purchase insurance policies. Moreover, some companies preferred to pay by instalments instead of a lump sum upfront, as is required by most annual renewable general insurance policies.
This led Kuan to start Premium Capital Partners Sdn Bhd, which provides insurance premium financing for businesses, in 2005. “After researching insurance premium financing and understanding more about the insurance model from veterans of the insurance industry, a few partners and I came up with a localised financing model specifically for insurance premiums that also complies with the regulatory environment,” says Kuan.
Last year, he was granted the licence to offer this solution on a peer-to-peer financing (P2P) platform to retail investors through Crowd Sense. The platform, named Cofundr, was launched in July. It is currently the only P2P platform in Malaysia focused on general insurance premium financing.
Cofundr targets a different audience from Premium Capital Partners, which mainly serves bigger corporations and draws funds from high-net-worth or corporate investors. By launching Cofundr, Kuan is extending insurance premium financing to SMEs and retail investors.
“Before this, there [had not] been such a solution to help SMEs pay for insurance policies or at least, spread out the payment over a period of time, in Malaysia. That’s why we decided to create this product. Investors are indirectly helping SMEs to better manage their risks through insurance,” says Kuan.
“At a time when most SMEs are still recovering from the effects of the Movement Control Order, paying their premiums in monthly instalments enables them to conserve working capital and use it to generate income, as well as have better cash management.”
Insurance premium financing — even for personal life policies — has been available for decades. For instance, CIMB Singapore offers this solution under personal loans and financing to its customers. JP Morgan Private Bank also provides it for those who want to ensure that their heirs can afford to pay estate taxes by purchasing a high-value life insurance policy.
However, this solution is still uncommon in Malaysia, according to Kuan. As such, it was not easy for him to introduce the product to insurance companies, its intermediaries and policyholders.
“But as the industry developed over the years, particularly in the area of risk and compliance with regard to the timely collection of premiums, interest in premium financing rose,” he says.
Cofundr’s launch was scheduled for late last year, says Kuan, but it was delayed owing to personal reasons and, later, the Covid-19 pandemic.
But the launch could be seen as timely now given that it assists SMEs to purchase and maintain insurance during tough economic times. At the same time, it offers investors a relatively low-risk product that provides higher returns than fixed deposits, adds Kuan.
“During this period, we expect managing investment risk to be a more challenging task for investors. With Cofundr’s insurance premium financing notes, investors will be able to benefit from the attractive returns … Our proprietary credit and recovery model is designed to safeguard investors and allow for high recoverability of investments in the unlikely event of a default.”
According to Kuan, insurance premium financing notes are relatively low risk because if the issuer, who is the policyholder, defaults on a payment, unearned premiums will be returned to the investor.
In general, the cancellation provision in insurance policies requires insurers to return the unearned premiums to the policyholder. “For instance, if you sell your car and you still have six months left in your car insurance policy, you can ask the insurer to cancel your policy and it will refund you the unearned premiums. This is similar to other general insurance products,” says Kuan.
In Cofundr’s case, the platform will take assignment of the policies. The note of assignment will be issued by the policyholder to the insurer, whereby the policyholder will agree to assign the policy to Cofundr as well as to other terms and conditions. This assignment of policy is taken as collateral for the notes.
When an issuer defaults on the payments, the platform will request the insurance company to issue a cancellation notice to the issuer and the unearned premiums will be refunded to Cofundr. Subsequently, the investors will receive their principal back.
“In other words, although the credit risk of a note may have been based on our assessment of the issuer’s repayment ability, the recovery risk is based on the refund of the unearned premiums from reputable insurance companies. The recovered amount is then utilised to repay the outstanding principal on the note,” says Kuan.
The risk of getting your principal back is predicated on the insurance companies, which are triple A- to single A-rated firms, he adds.
“In terms of the likelihood of default, every note that we host will be assessed for its credit standing and its probability of default. This assessment is based on Cofundr’s in-house proprietary credit analysis coupled with references to credit score reports.”
The gross return rates are projected to be between 6% and 15% per annum, depending on the credit risk of the issuer. The minimum investment amount per note is RM100, and the minimum deposit required to activate a new account is RM1,000.
The expected average tenure for the insurance premium notes is eight months. Cofundr will also host working capital financing notes, which have an average tenure of 24 months.
Structuring payment using instalment plans is especially relevant now that many companies are struggling because of the pandemic. Insurers, however, are not able to provide this option due to central bank regulations.
According to Kuan, insurers need to collect the premiums before coverage commences or within 60 days of the policy inception date to ensure there is no interruption to the coverage.
Because of this, Kuan hopes that retail, corporate and institutional investors would consider investing in insurance premium financing notes.
“Most funds won’t go into P2P financing because they are not mandated to do so, considering the risk. We’ve provided assurance for them with our product because the refund is based on policy conditions. The refund [unearned premiums] will always be enough to cover the investor’s exposure in the note,” says Kuan.
“If the SME pays back the monthly instalments with principal and interest, the investors win because they make risk-adjusted returns that are higher than that of fixed deposits. If the SME defaults, investors can recover their principal. You can earn interest up to the point of default and in the worst-case scenario of a default, you can get back your principal.”
SMEs that approach insurers and want insurance premium financing will be introduced to Cofundr. They could also apply directly on Cofundr’s website.
Bank Negara Malaysia’s 2018 Financial Stability and Payment Systems Report found that only 54% of the 1,529 SMEs it surveyed had insurance or takaful products.
“If you look at the general insurance market, it’s over RM18 billion last year. But based on some of the statistics I’ve seen, it represents 60% of the potential market size for general insurance. So, we still have close to 40% of businesses that don’t have general insurance or are underinsured. There is still a lot of potential for us to grow the market,” says Kuan.
He was unable to offer insurance premium financing to all SMEs through Premium Capital Partners because the latter was limited by its balance sheet and source of funds.
“From our experience, we have been very encouraged by the acceptance of the product [under Premium Capital Partners] and the demand for financing that exceeds our capacity every year. That’s why our next natural step was to develop a P2P model to ensure that access to insurance premium financing is made available to all SMEs, and to share the benefits of investing in these notes with everyone,” says Kuan.
Premium Capital Partners has experienced a default rate of less than 1% to date, he adds. In those cases, it managed to successfully recover all of the investors’ principal.
When asked what kind of returns has been generated, Kuan says, “We can safely say that we generated appropriate returns to our investors in line with the risk they assumed.”
Why do large corporations opt for insurance premium financing? According to Kuan, some of Premium Capital Partners’ clients that had to pay huge premiums opt for instalment plans because they wanted to conserve their cash flow.
“They prefer to put the money in some income-generating assets and make a higher return than the cost of funding the insurance premium financing,” he says.
Banks also generally do not provide loans for companies to pay their insurance premiums. “However, in certain cases, banks will do it if you’ve taken a loan from them to purchase a commercial building, for instance. They will throw in the financing of the insurance as part of the package,” Kuan explains.
Premium Capital Partners has worked with insurers such as Great Eastern Malaysia, Lonpac Insurance, Chubb and RHB Insurance. Kuan says he will continue exploring these partnerships with Cofundr.
“This has never been offered to all SMEs before. We have been encouraged by the response so far. Every time we talk to a potential issuer, they are excited about it,” says Kuan.
Since Cofundr’s issuers are SMEs instead of the larger corporations that Premium Capital Partners serves, could the retail investors of Cofundr be taking on more risk?
“Generally, the risk profile of SMEs is higher. But if they default, investors will get their money back. That’s the most important thing,” says Kuan.
Due to the pandemic, many businesses are conserving cash and may forgo insurance payments. The central bank has encouraged insurers to assist policyholders in paying their premiums at this time, including by restructuring policies to reduce the amount of premiums payable.
“There are people who cannot pay their premiums and have requested for instalment plans from insurance companies. RHB Insurance recently offered a Premium Instalment Scheme for policyholders who are affected by Covid-19. This is testament to the fact that there is demand for the product,” says Kuan.
As at end-July, the company had successfully funded one note on the platform. Kuan expects two new notes to be hosted in the next few weeks. Currently, the company is finalising collaboration agreements with more insurers to introduce this product to potential SMEs. Once this is done, Kuan expects a consistent volume of insurance premium financing notes to be offered monthly.
“We work with insurance companies, which will recommend their policyholders and allow us to access their agency and brokers’ network. We talk to them to identify the policyholders that would like to make instalment payments for their premiums,” he says.
The insurance products that can be financed include liability insurance, theft insurance, fire business interruption insurance and engineering insurance.
“Our experience has been that over 95% of the customers are repeat customers. They will renew their policies and take up premium financing again next year. We project the demand for insurance premium financing to grow over the next five years to the point where one in three policyholders will be taking advantage of premium financing,” says Kuan.
He does not currently have plans to create a secondary market, as the insurance premium notes are relatively short term. In addition, a secondary market will require a high volume of transactions.
“Until we reach that level, it may not be effective for us to run a secondary market. But we are looking at other options to improve the liquidity of the platform,” says Kuan.
Since insurance premium financing is a new product in Malaysia, it might take some time before the market becomes familiar with it. Therefore, Cofundr will also be offering other types of financing products, including working capital financing notes, to ensure investors have a variety of options.
“As the provider of such notes, we are very bullish on the market. We believe there will be enough insurance premium financing notes. But at the same time, we also recognise that we need to help the market understand the product,” says Kuan.
The company will be rolling out information campaigns to create awareness of insurance premium financing via P2P platforms.
“We look forward to working with insurance companies and their intermediaries to provide value-added solutions to their policyholders,” says Kuan.
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