By Steve Memolo, National Account Development Manager at Vanguard Dealer Services
Vehicle reinsurance helps dealers increase profits. It’s no secret that on the front end, it’s difficult to make a real profit on selling vehicles, and that profitability is trending down. A typical dealership has four business units: sales, service, parts, F&I. Reinsurance is a fifth business unit, and it needs to be treated like one.
Reinsurance puts you, the dealer, in the driver’s seat headed to a more secure, profitable future.
Reinsurance is a business that incorporates a specialized financial product and opens up a new avenue for growth and stronger gross profits for dealers. Dealers already sell a host of F&I products with insurance companies that enter into contracts with your customers. Dealer reinsurance, as an entity and your own business, allows you to share in the underwriting profits on these same F&I products that you are already selling, including powertrain, vehicle service contracts, and more.
Plus, the advantages don’t stop there. Another caveat for building up a reinsurance business is resulting in customer satisfaction and loyalty. Instead of a third-party vehicle service contract provider making decisions about your customers, their claims are now in your hands, you are in control of the customer experience.
Shedding Old Misconceptions and Apprehensions
Unfortunately, there have been some misconceptions around reinsurance in the past, largely based on regulatory issues that existed. Today the reinsurance industry is properly regulated, and as long as compliance is adhered to, dealers shouldn’t have any problems in making reinsurance a highly successful and fundamental part of their business.
Also, if you currently have your own reinsurance business (or have had) and are less than satisfied with the results, you need to examine what your provider is doing to help you grow that business. Do you consistently review your statements? How much control do you have over your reinsurance account? Seek out reputable consultants who truly understand reinsurance and will empower you to increase profits and customer service. Your plan needs checks and balances. Some dealers don’t really know what they have, leaving money on the table. You need that experienced second set of eyes. Consider getting a reinsurance audit.
Some important questions to consider include:
- How flexible is your program related to market changes?
- How much control do you have over the money?
- Can you borrow against your premiums?
- What is your current provider doing to help you grow the business?
- How well is it doing, and as compared to what?
Creating the Right Reinsurance Mix
Your reinsurance program needs to include a mix of the right products, and not include products that simply don’t make sense. Many administrators advise dealers to put everything into the reinsurance business, but if you aren’t making money and the risks are too high, these products don’t make sense. We advise looking at products on a customized, individual basis to assess the risk. One example would be GAP insurance. GAP is a product that needs to be effectively spread over a large book of business because of historically high losses. We push banks to lend more than they normally would, so why push risk on one end and then take it on the other?
Let’s Talk About Risk
As with anything business, there are some risks. However, even a risk-averse dealer can participate in having a reinsurance business. Risk can emerge in unanticipated ways but primarily the risk with reinsurance is having to pay off claims if they exceed the deposits and profits in the account. However, if your business is handled properly, like any other business, it will help build your customer base, keep your service drive working, and retain your customers for repeat business.
Know Your Reinsurance Business Options
Understanding the various options associated with reinsurance is important. There are different types of reinsurance opportunities, including:
- Controlled Foreign Corporation (CFC) is taxed as a U.S. company though also domiciled in an offshore country. The company assets are maintained in U.S. financial institutions. There is more flexibility wherein you can work with investments of your choice, take a loan against the investment, and pay yourself back. You can use the money for capital improvements, floor planning, and business investments. This type of reinsurance plan becomes your book of business.
- Dealer Held Warranty Company (DHWC) is an administrative corporation devised as the obligor. The DHWC is owned by a dealer or a dealer group and administered by a third-party. The contracts within a DHWC can be more customized with tie backs to the dealership for service. These are typically treated as an insurance company for tax purposes. This type of reinsurance plan also becomes your book of business.
- Noncontrolled Foreign Corporation (NCFC) is where the money is domiciled in an offshore country and claims are paid out of it. This type provides the least amount of flexibility to control the investments. Premiums may be subject to excise taxes. With this type of plan, you may take dividends, which become surplus and repatriate the money. This provides the lowest risk, but also the lowest returns.
Choosing a Trusted Partner
Reinsurance is not one-size-fits-all. The reality is that many consultants lack the expertise needed to help you implement a strategy and guide you through the process. Your provider needs to assist you in managing the business, from start-up, through implementation, development, and growth. You want low risk and easy setup. Choose a provider with a track record for success.
Reinsurance puts you, the dealer, in the driver’s seat headed to a more secure, profitable future. Reinsurance funds can be applied to expand your business or be put towards retirement wealth. It’s both a source of income that can help grow and protect your dealership and give your customers peace of mind and strengthen their direct relationship with you.