Maximize the Benefits of Reinsurance: Part IV

This is the final installment of a four-part look by Buckeye Dealership Consulting’s CEO Rob Fox regarding the ways independent automobile dealers and finance companies can maximize the benefits and profit opportunities that come from establishing their own reinsurance company.

PART IV: Investment Income and Tax Advantages

As your reinsurance trust account grows, you will have the opportunity to invest those funds in accordance with your own risk tolerances and financial needs. You have complete control over the investment strategy because – the funds are yours!

Many are concerned about the credit markets and the availability of capital for dealers to run their businesses. Some dealers may need an injection of cash to stay the course, or perhaps you’re looking for capital to fuel growth. A dealer’s reinsurance company can lend the dealership earned premium to provide necessary liquidity to take your business where you’d like it to go.

You may be wondering what tax implications exist if you tap your reinsurance funds. Once premium is fully earned, you may have the ability to use those funds in a tax-advantageous manner. The good news for some is you may be taxed at long-term capital gains rates and not at ordinary incomes.

But, let me emphasize that you should always, always, always consult your tax professional for any advice and tax strategies. That’s not just a boiler plate disclaimer, it’s sound advice. And, while you’re chatting, ask for an opinion on the benefits of reinsurance.

Estate/Succession Planning Tool
Over my years in meeting and working with independent dealers, I have encountered great entrepreneurs that have built successful businesses from the ground up. At some point, most realize they need succession plan – an exit or retirement strategy.

Your reinsurance company funds can be an integral part of this plan. You can build a large amount of wealth over a relatively short period of time. Your reinsurance entities can allow for multiple owners affiliated with your family members and/or business partners. You can use those earned premiums as a resource to plan for a future in or out of the business.

Let me close with an anecdote from a CPA who specializes in management, finance and taxation of automobile dealerships. The CPA said he discussed reinsurance with a dealership client. For whatever the reason, the dealer was reluctant to form a reinsurance company. After several years of discussing the topic, the CPA finally agreed not to bring up the subject again. One day, the CPA could no longer hold back. He looked the dealer in the eye and said if you don’t want to form a reinsurance company, then you’re also saying you don’t want an extra $200,000 in additional net claims deposited into a brokerage account for your benefit. The dealer finally saw the light and got reinsurance started. I’m not sure where the $200,000 number came from, but for our purposes, it doesn’t matter. The point the CPA made is this. If you don’t want extra money, then reinsurance isn’t for you. If, however, you enjoy having more control, improved customer relations, and more cash, then doing something is better than doing nothing.