Few in the insurance industry would have felt the effects of the global downturn quite as acutely as premium funders.

With a business model critically dependent on the availability of capital and premiums high enough to make funding attractive, it’s been a tougher time of late.

While the market is reportedly picking up and providing funders with hope after several lean years, the difficulties experienced by medium-sized funder Centrepoint Alliance have been observed by the local insurance market with interest.

The company has been forced to undertake a major restructure to avoid going into run-off.

In March, the Brisbane-based company reported an interim loss of $565,000 after poorly performing commercial finance units dragged the overall result into negative territory.

To be fair, at that point its struggles were more to do with the vagaries of commercial finance rather than the premium funding business, which hitherto had returned a regular profit. Directors subsequently trimmed the fat to focus on premium funding after the unit returned $2 million net profit in the six months to December 31.

With the restructure sorted out, Centrepoint looked to be regaining market momentum until Wesfarmers Insurance lowered the boom by quitting its preferred funding agreement to set up its own facility. That cost Centrepoint a full-year loss of $2-3 million before $17 million in goodwill is even considered.

Directors instigated a voluntary stop on trade in Centrepoint securities from April 30 to July 1 while they considered their options.

Key financial backer National Australia Bank (NAB) has now given Centrepoint until September 30 to convince the bank it can broaden its funding base to reduce strategic funding risk.

Burning the candle at both ends is Centrepoint Premium Funding CEO Bob Dodd, who told insuranceNEWS.com.au he’s confident about the company’s future as a premium funder.

“Our progress on a number of activities including sourcing of alternative funding is to plan and back on track,” he said in a generally upbeat prognosis on Friday. He says the core focus of the business remains viable and points out that the squeeze on funds has affected every company, regardless of size or financial backing.

“The key for us applies just as much to other players. We are going forward with a number of options, versus being tied into one arrangement.”

Pacific Premium Funding Chairman Grant Burley agrees with his counterpart – to a point.

“The international credit squeeze is tough on the economy and some of these factors are outside the control of our sector,” he told insuranceNEWS.com.au.

He agrees the backing of giant parent company GE Commercial Finance does provide a certain sense of security.

“GE’s number one issue is growth,” he said. “We’ll write as much business as we get provided clients meet the credit criteria, but I say that with caution. We’re trading carefully.”

The largest players in this market appear to have the least to fear. Allianz Finance CEO Brad Bartlem says wholly owned subsidiary Hunter Premium Funding has Allianz Australia’s AA-/Stable rating as powerful backing.

“The credit crisis has had little impact, as we have a reliable and secure source of funding through our very supportive parent,” he said.

Ibisworld Senior Analyst Richard Jeremiah confirms that the biggest premium finders are experiencing an easier ride through the credit storms.

“The AAA-rated companies don’t face much of a premium above the Treasury rate, and the gap between AAA and AA has widened so that the AA players pay even more for their financing,” he said. “When you get down to BBB the spreads get wider and wider.

“Though the costs are increasing for everyone, big companies are benefiting the most from this changing market,” he said. “It makes it very, very challenging for the others.”

That’s not to say companies like Hunter aren’t proceeding with caution.

“Volumes have been impacted by tighter credit assessment procedures where maintaining credit discipline has been paramount,” Mr Bartlem told insuranceNEWS.com.au.

Small wonder. Data from the Australian Securities and Investments Commission suggests insolvencies are up 23% on last year, while directors of premium funding companies concede evidence of an increase in delinquency and business failure across the SME sector.

Macquarie Premium Funding CEO Gary Seymour says a prudent approach is crucial.

“The general observation through to the end of the financial year is that trending of arrears is heading upwards and from a premium funding perspective that is an increasing issue,” he said.

On the positive side of the ledger, the economic downturn has increased demand for premium funding across the industry as higher insurance premiums and tight credit conditions force firms of all shapes and sizes to take a closer look at the product.

And the premium funders do agree there’s increasing demand for the product and their outlook is generally positive. Mr Bartlem expects a “much better picture in six months when June renewals have made their way through the system”.

But Mr Jeremiah says contrary conditions are also working to limit demand, particularly among firms at the small end of town.

“Smaller businesses are caught in a catch-22 situation,” he said. “They might be in dire need of premium funding to improve their cashflow, but they’re also facing the prospect of paying more to access the funding facility."

They’re feeling the squeeze, says Mr Seymour.

“Premium funders have to manage their arrears tightly and it’s similar with brokers,” he said. “Premium funding is not a tool for transferring clients with financial difficulty; the solution is for brokers to have a courageous conversation with clients and to do the due diligence to ensure they are on the front foot.”

Mr Jeremiah says it’s an interesting market "in that there’s increased demand and less supply. Looking at the economics of the product, with a higher risk you can see people are paying more for it.”

So while the conditions are improving for Australia’s premium funders and insurance-buyers are considering their products more carefully, there’s still plenty of insecurity around. Premium rates aren’t rising as quickly as the funders would like, and the continuing availability – and cost – of capital will keep everyone on their toes.

“I am very positive about the outlook of the market from our perspective, rates are beginning to firm and clients are becoming more aware about it as an option,” Mr Seymour said. “Where I am conservative is the diligence required around terms.”