As we all know, we have been in a hard market for several years now. Along with the premium increases and more restrictive coverages we have discussed, another result of the hard market is more and more insureds are obtaining coverage with programs, which are excellent options, but rarely offer installments or with Excess & Surplus Lines markets, which also don’t offer installments. Many properties simply do not have enough money in reserves to pay the insurance premiums in full or just don’t want to, so the only way to pay on installments is to finance the insurance policies. That isn’t something out of the ordinary. Last year, approximately 15% of our insureds financed their insurance premiums. This year, that figure rose slightly to 17%. The difference is the interest rates are higher. Much higher.
Why? Because the fed had seven rate increases in 2022. People who want to finance are seeing their new finance rate and absolutely shocked, and I can’t blame them! Only recently, in March of 2022, the prime rate was 3.5%. Now, it is more than double that. Below are the increases and the date they took effect.
12/15/2022 7.50%
11/3/2022 7.00%
9/22/2022 6.25%
7/28/2022 5.50%
6/16/2022 4.75%
5/5/2022 4.00%
3/17/2022 3.50%
Currently, the prime rate is 7.5%. Insureds are balking, saying their finance rate last year was 6.95%, and can’t understand why they are seeing interest rates above 10% only a year later. Understand that most, if not all, finance companies do not want to charge a rate lower than the prime rate. In addition, in most situations, the way finance companies make money is they typically borrow money via a line of credit from a bank and then charge a higher rate and then pay the bank back and keep the difference. So if they are getting charged a rate of 7.5%, they are losing money if they charge less, and you can be assured that they aren’t going to finance a loan that is guaranteed to result in them losing money. So, expect to pay a much higher interest rate this year. Ways you can offset it a little bit are:
- Pay in less installments. Many insureds opt for the most installments, which is generally a down payment and nine installments, but you may wish to take lower installments, which may lower the interest rate.
- Put a higher down payment down. The more you put towards your down payment, the less you are financing. That may not lower the interest rate, but you will pay less in finance charges.
Eventually, the fed will lower interest rates when they feel the economy can handle it, but for the foreseeable future, expect to pay more in interest rates. If you do have enough money to pay the premium in full, you may wish to. The amount of interest being generated by keeping some of the money in the bank pales in comparison to the interest rate you will be paying.
Reach out to our Accounting Manager, Valerie, with questions anytime.
