This is the first 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 I: What is Reinsurance?
Whether you’re a retail or buy here, pay here dealer, there are benefits that come with having a robust F&I department. Whether it’s that service contract or GAP waiver you’re selling, the warranty you’re offering, or the collateral protection insurance you may be placing, your F&I office can provide customers with voluntary protection products that will benefit them in time of need.
Dealers frequently work with insurance companies that enter into contracts with your customers when offering these products. The customer will pay a premium to the company, often financed in the retail installment sales contract, and the premium is remitted to the carrier who assumes all the risk – but retains all the profits. If a customer needs to file a claim, the insurance carrier or their administrator handles all claim-processing responsibilities.
Other programs, referred to as “retro programs,” are similar. You sell the product, get a commission, remit the premium to the insurance company and, once the premium has been fully earned, you may get some small profit share.
Reinsurance transfers the risk from the “big” insurance carrier to you. How? As a dealer, you can create your own insurance company. The reinsurance company then engages a management company to create a customizable program, set up the corporation, administer the claims, provide accounting services and prepare tax returns. The management company will also train your staff and monitor your programs.
So, when you sell that service contract for let’s say $1,299, you don’t send the $1,299 off to an unaffiliated third-party. Because you’re the reinsurer, that money ends up in your hands – minus small administrative expenses and ceding fees.
Coming: Part II: Reinsurance Adds an Additional Profit Center