Auto dealers today are using their reinsurance companies to accomplish goals that earlier, less flexible reinsurance models couldn’t help with. Traditionally, dealers only expected reinsurance premiums to cover the costs of warranty claims and cancellations. However, reinsurance administrators now offer reinsurance programs with greater flexibility — not only in terms of what types of financial instruments the funds can be invested in, but also how dealers can use their reinsurance funds for other purposes.
Some reinsurance administrators offer dealers greater flexibility in key areas. First, an increasing number of administrators offer dealers new options for investing their funds in instruments that can provide greater returns than the cash, cash equivalents and bonds that used to be the industry default.
This represents a huge opportunity for dealers, because investments in equities may increase your returns over the life of the reinsurance company. Reinsurance administrators are also offering dealers new ways to access their funds both before and after they are earned out. For example, earned out funds can be moved into surplus accounts that are entirely under the dealer’s control.
Most significantly, dealers are using their reinsurance companies to meet two very different types of financial needs:
1. Getting business loans — In a more flexible reinsurance model, you have options for accessing your money before it’s earned out, by taking out a loan on the funds as opportunities arise. This way, if you need funds to acquire a business, update your floorplan, or make other business improvements, you simply work with your agent and financial advisor to establish repayment details and then get the funds you need, without having to go to the bank.
2. Creating your own retirement fund — Another strategy is to treat your reinsurance company as your personal retirement account. If you’re in your 40s, for example, and don’t plan on accessing your money for another 20 years, you could work with your financial advisor to request an exception from your reinsurance company trustee to allow you to invest some your funds more aggressively than a standard IPS would allow. This strategy is similar to that of traditional retirement investing where the long time horizon allows you to tolerate greater volatility in the hope of making greater returns over the long term.
One aspect of the reinsurance model, however, remains the same: for effective management of your reinsurance company, you should continue to meet with your reinsurance and financial teams on a regular basis. That includes meeting with your agent for quarterly cession meetings, in which you discuss any changes in your reinsurance needs, the payment of specific warranty claims, and financial performance of your reinsurance company.
By viewing your reinsurance company as one component of your comprehensive financial plan, you and your financial team can manage your full financial life. Keeping your financial advisor up-to-date on all financial matters helps him/her better advise you on your investments and cash flow to best suit your needs.
In a relatively short amount of time, auto dealer reinsurance has come a long way. While its original purpose was only to cover the cost of warranty claims in a tax-favored environment, now it can be a much more strategic part of your overall financial picture.
Working with a flexible reinsurance administrator and your financial team, you can use your reinsurance company to meet a broad array of cash flow and retirement needs. In addition to ensuring a smoothly running process for accepting warranty payments and retaining sufficient funds to pay for any valid claims and cancellations, your reinsurance company can become one of the most important elements of your financial landscape.
If you’re on the fence about whether it is right for you, speak with your agent and financial advisor. And remember: the sooner you start the process, the better.
Planned and managed correctly, the automotive reinsurance model can significantly improve the financial strength of your business. In addition, it has the potential to play a huge role in your and your family’s financial future.