Insurance Premium Financing – For those who cannot afford!
Thank you for the encouraging response and feedback to the previous article on Insurance Premium Financing. The comments on the article suggested that the Insurance Premium Financing (IPF) for the non-life insurance is a comparatively lesser known and less understood concept. Hence, I thought of dedicating the article this week focusing on IPF for non-life insurance. The best way to understand any concept is to start by addressing why it exists and what problem it solves. And hence, as Simon Sinek recommends, we too are starting with why!
Why do you need insurance when you can’t afford to buy it?
Having spent over a dozen years in the insurance industry, it is easy for me to appreciate the need and importance of insurance. If I could put in simple words, the purpose of insurance is to protect the insureds from financial consequences of risks. Insurance becomes all the more important for those who don’t have the “cushion” to deal with unplanned financial strain arising out of situations not entirely in their control. For example, while one can take care of one’s health, it is impossible to guarantee that one would never fall sick and hence never see a doctor. Equally, one could have security systems for a house but thefts can happen and lastly one could drive the vehicle carefully but that doesn’t guarantee zero accidents! The bad news is that the events mentioned above impact people in lower strata more than those who have savings to partially protect them against the shock. The good news, however, is that one could cover oneself through insurance and get the premiums financed.
How does insurance premium financing work?
Before we get into the structure of insurance premium financing model, let’s see how the regular insurance arrangement looks like. The diagram below captures a simplified version of the arrangement
The regular insurance arrangement is straightforward but helps to set-up the foundation for the IPF insurance arrangement, which is depicted in the diagram below.