Despite the tenuous state of the capital markets, the ratings of most life insurance companies have held up well.  This is important in the premium finance marketplace, since institutional lenders do not like to finance policies issued by carriers with poor ratings.

The five major risks associated with institutional premium finance that have adversely affected arrangements implemented over the last several years are:  Interest rate risk; Policy performance risk; Collateral risk; Investment risk; and Lender risk.  It does not take much imagination to figure out why recent adverse experience with each of these risks has led to a different premium finance marketplace today.

Institutional premium finance today tends to follow the following parameters:  (1) Shorter-term loans, in many cases no longer than 5 years.  (2) Higher basis point spreads over LIBOR, in the range of 250-350 bps, or perhaps even more.  (3) Letters of credit with fees as high as 300-400 bps.  (4) Stricter requirements on collateral, with real estate generally not being acceptable.  (5) Greater attention to product design.  (6) Longer-pay scenarios.  Within these parameters, however, institutional premium finance arrangements are once again becoming viable and available.

As stated in our prior comments, if you have a situation in which the client can pay the premiums but would prefer to use OPM for a limited period of time, be sure to contact us so that we can seek out the best premium finance arrangement to fit your client’s particular situation.