The Role of Remittance and Retention in Premium Finance

The terms remittance and retention apply almost entirely to the down payment in a premium finance loan (although in commercial lines financing, these two terms may apply to the down payment plus any past-due installments).

These two words define the amount of the down payment that are retained by the agent (held on to by the agent and not sent to the finance company) and/or remitted by the agent (sent to the finance company by the agent).

The first logical question is, "Why would an agent retain some of the down payment and/or past due installments and remit other portions?"

To understand why this might happen, it's first important to understand what makes up the down payment in a premium finance loan. Here are those components:

1. A certain percentage of each policy premium
2. A certain percentage of any taxes or fees associated with the policy
3. A certain percentage of the broker fee

When you look at the components of the down payment, the only piece that would make sense for an agent to retain would be the broker fee. However, what is implied here, but not explicit enumerated, is the agency's commission.

When an agent sells an insurance policy, the agent is typically paid a commission by the insurance carrier. This commission can vary widely from 3% to 20% or more of the premium. Depending upon the relationship between the agent and the insurance carrier, the agent may be permitted to take their commission out of the down payment paid by the borrower. If the agent is not permitted to do this, they must send the commission to the insurance carrier (or to the premium finance company that eventually sends it to the carrier). When this is the case, the carrier will eventually send the commission back to the agent at a later date.

If the agent is permitted to take their commission from the down payment, which is true in most cases, the agent retains the commission.

Calculation of Remittance and Retention

Using a $10,000 premium example (with an agency's commission of 10% and some taxes and fees), the calculation of the down payment in the most common scenario would be as follows:

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Let's now walk through the calculations:

First, you may notice that the Total Premium combines the policy premium, taxes & fees related to the policy, and the broker fee. This might seem odd at first, but it is just standard industry speak so don’t be confused as to why the Total Premium includes taxes and fees. Some finance companies refer to this total as the Cash Price to avoid confusion – but they are the same thing.

If the premium finance company sets the down payment at 20%, then the borrower initially must pay $2,000.00, representing 20% of the premium, and then 100% of the policy taxes and fees and 100% of the broker fee.

The down payment therefore is calculated as:

• The percentage of the policy premium required upfront by the finance company (20%)
• The percentage of the taxes and fees required upfront by the finance company (100%)
• The percentage of the broker fee required upfront by the finance company (100%)

($10,000 x 20%) + ($567.35 x 100%) + ($100 x 100%) = $2,667.35

The down payment is the amount the policyholder must pay upfront to secure the premium finance loan.

Now that we know how the down payment is calculated, let's discuss how we determine remittance and retention.

As discussed above, the amount of the down payment to be retained by the agent will be:

1. The agency commission (10% of the premium = $1,000.00)
2. The broker fee (100% of the broker fee = $100.00)
3. The rest of the down payment that ultimately must be delivered to the insurance company ($1,567.35)

The policyholder is required to pay a down payment of $2,667.35. The agent collects this amount. Of this amount, the agent will retain $1,100.00 and send the remainder to the insurance company.

This is a very plain vanilla explanation of how remittance and retention works. However, there are variations which occur commonly.

Variations to the common scenario

1. The agent may send what they don't keep to the finance company instead of the insurance company.
2. The premium finance company may not require the down payment to include 100% of the taxes and fees (or broker fee).
3. The finance contract may be set up late and one or more monthly installments may already be due (or due very soon). In this case, the finance company may require that those installments be collected upfront.

Variation #1

An agent sends what they don’t keep to the finance company instead of the insurance company. Why would the agent do this? The most common reason is that if the agent sends the down payment to the insurance company and then the finance company funds the balance due, the insurance company must keep track of two payments rather than one. It might be easier for them to know that all of their money is coming from one place.

If this should happen, the remittance and retention are affected as follows:

• Retention: $1,100.00. The agent keeps only their commission and their broker fee
• Remittance: $1,567.35. The agent sends this amount to the finance company and the finance company will include it in the amount it sends to the insurance company

This variation doesn't happen very often.

Variation #2

This variation occurs often and is the result of competition. If the finance company requires the policyholder to pay 100% of the taxes and fees upfront in the down payment, the down payment is high. If the finance company allows the policyholder to pay less than 100% of the taxes and fees upfront, the down payment is lower. Oftentimes, the lower down payment wins the deal. This variation requires a recalculation of the down payment which will result in a change of the remittance and retention. Here is a scenario where the finance company has offered to allow the policyholder to pay 20% of the policy taxes and fees (but still 100% of the broker fee) in the down payment.

Policy Premium$10,000.00Policy Taxes and Fees (assume all are fully earned)$567.35Broker Fee$100.00Total Premium$10,667.35Down Payment (20% of the premium + 20% of the policy taxes and fees)$2,213.47Amount Financed (to be paid by the finance company to the insurance company)$8,453.88Retained by the agent:$2,213.47Remitted to the Finance Company:$0.00

Here's how the figures above are calculated:

1. Down Payment
   • 20% of the policy premium = $2,000.00
   • 20% of the policy taxes and fees = $113.47
   • 100% of the broker fee = $100.00
2. Amount Financed
   • 80% of the policy premium = $8,000.00
   • 80% of the taxes and fees = $453.88 (the portion of the policy taxes and fees that the policyholders did not pay upfront)

The only difference between this variation and the common scenario is that the finance company has agreed to finance 80% of the policy taxes and fees ($453.88). This amount is included in the monthly installments that the policyholder will ultimately pay over time.

The agent will keep $1,100 of the down payment and send $2,113.47 to the insurance company (made up of $1,000 of the policy premium and $1,113.47 of the policy taxes and fees). The finance company will then send $8,453.88 to the insurance company which includes $8,000 of the policy premium and $453.88 of the taxes and fees. The final breakdown is as follows:

1. Agent keeps their commission and broker fee of $1,100.00.
2. Agent sends $1,113.47 to the insurance company.
3. Finance company sends $8,453.88 to the insurance company.
4. Insurance company is paid a total of $9,567.35, which is the premium, less the commission to the agent, plus all of its taxes and fees.
5. The policyholder has a loan from the finance company in the amount of $8,453.88, which they will pay back to the finance company over time with interest. This loan amount consists of the 80% of the premium plus 80% of the policy taxes and fees that weren’t paid upfront.

In this case, remittance (the amount the agent sends to the finance company) is still $0.00 and the retention is the entire down payment (because the agent didn’t send any money to the finance company).

Variation #3

This variation occurs from time to time when a premium finance contract is set up late and one or more installments are soon to be due or are already past due. In most cases, the first monthly installment is due one month after the effective date. An example might be that a policy is effective 01/01/2023 but the financing isn’t set up until 02/05/2023. In this case, the first monthly installment was due on 02/01/2023 but the financing wasn’t set up until after this. Here, the finance company will almost always require the policyholder to pay the down payment and any past due installments upfront before they will make the loan.

Starting with the common scenario and factoring one past due installment into the formula yields the following:

Policy Premium$10,000.00Policy Taxes and Fees (assume all are fully earned)$567.35Broker Fee$100.00Total Premium$10,667.35Down Payment (20%) paid by the policyholder$2,667.35Past Due Installment (assuming an APR of 9% and 10 monthyl installments)$1,041.71Amount Financed (to be paid by the finance company to the insurance company)$8,000.00Retained by the agent:$2,667.35Remitted to the Finance Company:$1,041.71

1. The policyholder is required to pay with $3,609.06 upfront ($2,667.35 is the down payment and $1,041.71 is the past due February installment).
2. The agent collects this full amount, treats the down payment portion the same way it did in the common scenario above, but also sends the first monthly installment and remits it to the finance company.
3. The finance company will apply the $1,041.71 against the February installment when it first records the new loan account. The next installment due from the policyholder will be the March 1 payment.

In this case, remittance (the amount the agent sends to the finance company) is $1,041.71 and the retention is the entire down payment, $1,100.00 of which they will keep and $1,567.35 of which they will send to the insurance company.

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