Vehicle Service Contract Reinsurance: Hidden Profits for the Smart Dealer

Traditionally, the auto dealer has sold a third party vehicle service contract warranty in his or her store as a way to increase profitability in the F&I Department. Once the service contract has been sold the premium is then remitted to the warranty company. The dealer has then relied on the financial stability of the warranty company to administer the warranty and to pay any claims that may arise. As demonstrated by the recent collapse of a major warranty company, this may not always be the case. In many cases the dealer has been left with claims unpaid, unhappy customers; but more importantly, they were left unable to share in the potential surplus of profits that may exist as the warranties lapse.

 

The reinsurance concept allows the dealer or other parties to own and control their own insurance company that accepts premiums generated from vehicle service agreements and other aftermarket insurances. The insurance company holds these premium reserves and earns 100 percent of the underwriting profits and investment income from these premiums thereby providing the owner with a new profit and wealth creation center. The reserves are then reinsured, thereby limiting the risk to the selling dealer.

This concept has been marketed primarily to franchised automobile dealers for over a decade. It is not an “experiment,” and hundreds of satisfied references are available for review by any prospective client. Typically these clients have earned over 30 percent in underwriting profits plus any investment income that is earned on these premiums.

The programs have been built to ensure efficient cash flow and the maximization of profitability. One feature of the reinsurance program is the “Net-Net” remittance system. Warranty repairs made by the dealer are deducted from the premiums that are to be submitted, thereby accelerating payment to the dealer for repairs that are made. In addition, weekly funding of premium accounts, full accounting and reporting to the dealer are all standard. A major benefit to a dealer is that he or she is able to customize terms and coverages. The dealer has complete management control of the reinsurance company and is able to maximize the profit opportunities.

Reinsurance plans have recently been recommended as a way for dealers to ensure security and profitability for their service contract programs.

Dixon Odom, one of the largest Automotive accounting firms in the nation, stated in their newsletter of winter of 2004 “They (reinsurance companies) serve as an excellent way to provide dealers with attractive alternatives to compensate key management personnel, estate planning and best of all, generate additional profits that may be currently be left on the table.”

In the Automotive News edition of Nov. 24, 2003, an article was published regarding the recent collapse of a major service contract provider. As it relates to the reinsurance programs, it states “Dealers who had their own reinsurance companies had some money available to pay claims, while others with no backup funding generally have had to eat the cost of claims.” This is a great example of the security offered by owning your own reinsurance company.

Throughout the years dealers have used their reinsurance programs as a source for funding acquisitions of additional dealerships and real estate as sources of capital for funding dealer-controlled buy here- pay here operations to create tax-deferred wealth for retirement and a myriad of other capital needs.

Vehicle service contracts are a great way to improve customer satisfaction, provide confidence in the sales process and to improve the bottom line in a dealership.

Reinsurance can help take a dealership to the next level. The dealer can now ensure a customer is taken care of on a claim that might have been denied because they control their own reinsurance company. In addition, the dealer has the opportunity to create a major profit and wealth creation opportunity with smart management of their very own reinsurance company. With such a win-win scenario, can’t the smart dealer afford to uncover the hidden opportunity of reinsurance?

 

Vol 1, Issue 2