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Choices

It was November 2015, we had just had a Presidential election. Hopes were high, but so was uncertainty. A new administration was coming in, what would our business future look like? Fast forward to 2022 another starkly different administration, pandemic and hard to get inventory.

This story is about the choices two different, but very similar, Buy Here Pay Here dealers made and how the decisions they made affected where they are today.

Dealer A and Dealer B both reached out to our managing agency to inquire about Reinsurance.

First let me explain what got their attention.

Reinsurance allows you to be your own warranty company and more.

“You Don’t Sell Someone Else’s Cars, Why Sell Someone Else’s Warranties?”

I have been in the car business for over 30 years. Let me make it clear, I am not writing this to sell you a warranty. I am not here to tell you, like those 20 guys that stalk you every day, that I have the best coverage, lowest priced, Ten year-Unlimited Mileage-Bumper-to-Bumper for only $395, Warranty. I’m here to tell you why you need to own a reinsurance company. Especially in today’s climate. We have to maximize the dollars made on every sale.

A reinsurance company can provide you the highest return for the least amount of capital investment, of anything you do.

First, let me tell you how this works. The basics of all warranty companies are the same. What is covered is disclosed and priced, based on actuarial figures. That price dissected, includes what we refer to as an “Admin fee”. The admin fee consists of: fees to the administrator who administers the warranties and adjudicates claims; a fee to an insurance company to insure it; a fee to the agent; and a fee to the roadside assistance company. The total of the admin fee is usually 20% or less of the cost of the product. The balance of the cost of the warranty is the premium reserve. Premium reserve is set aside to pay claims. What happens to that reserve is the major difference between whether you own your warranty company or a third party does. Most warranty companies absorb any earned reserve (not used to pay claims) as underwriting profit. A warranty contract is earned based on the term. Example: 12 month contract earns 1/12th per month. Some warranty companies have what they call a retro or profit participation program. They will return a portion of the earned reserve to the dealer if the dealership produces x number of warranties and continues to do business with them. (So, if the dealer sells the store, retires or falls below a volume requirement, the warranty company is not obligated to continue including the dealer in its profit share.) If the dealer does receive a profit share, they will also receive a 1099 from the warranty company on what is considered commission, normally having the highest tax consequences.

The reason why you should consider owning a reinsurance company is, it is an easy way to expand your profits. As you can see, third party warranty companies profit from reserves not used to pay claims. Reinsurance allows YOU to make that profit. Any reserve not used to pay claims becomes underwriting profit. As an example, if you sell an average of 20 vehicle service contracts per month, and $800 goes into reserve from each customer’s Vehicle Service Contract (loss ratios vary), but for this example let’s say, $400 or 50% of every contract on average is used to pay claims. This leaves a $400 underwriting profit, which is $96,000 in additional dealer (stockholder) net profit per year and $480,000 additional dealer net profit at the end of five years. This does not include the retail profit made from the sale of the Vehicle Service Contract. If you sell third party vehicle service contracts now, the earned reserve is retained by the third-party warranty company as their underwriting profit, in this case $96,000 per year.

Another great reason to own a reinsurance company is reinsurance companies are small Property and Causality companies. “Small property and casualty insurance companies with less than $2,400,000 in annual net premiums may elect to be taxed only on investment income under Internal Revenue Code 831 (b).”

Most larger car dealers own their own reinsurance company. Smaller dealers can be unaware of the benefits and have the misconception that you must be a large volume dealer to make it work.

There are many products available whether you are a Retail, BHPH or Franchise Dealer to fill your reinsurance trust account and make taking care of your customer easy. Products that fit your individual needs such as GAP, Collateral Protection Insurance (CPI), Debt Cancellation Coverage (DCC), Vehicle Service Contracts (VSC), Limited Warranties, and numerous ancillary products.

With a Reinsurance Company, you have Nationwide Warranty Coverage, paid for by your customer, accounted as a dealership expense and you have control over policy design. All that in a New Profit Center that is Income Tax Friendly, to say the least.

Both Dealers A and Dealer B saw the great benefit in owning a reinsurance company.

Dealer A got started right away and initiated set-up of their reinsurance company. Dealer A currently has 2 Million dollars in his reinsurance trust account and has streamlined his BHPH business, making it more profitable as well, because of the structure having a plan for the inevitable will do for your business.

Dealer B wanted to get started…but got too busy. Put it off…and well…is still fighting the same problems he had in 2016 with ZERO in his trust account.

These two dealers had the same exact opportunity. The difference is that one saw the opportunity and implemented it. The other thought about it, started filling out the paperwork, got distracted and busy doing other things and dropped the ball. He left $1.5 million dollars on the table, not to mention the increased customer service opportunity.

You can’t drive a parked car.

You can make 2022 and beyond your best years ever.

Tim Byrd

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