The Fundamentals of Automobile Dealer Reinsurance

Automobile dealer reinsurance is a specialized financial product that helps auto dealers fulfill their warranty obligations for vehicle service and powertrain contracts, GAP insurance, tire and wheel protection, and several other finance & insurance (F&I) products. In addition, it allows the dealers to gain greater control over the financial aspects of their business.

In essence, you as the dealer create your own insurance company in the form of a C-corporation, and also assume the responsibility for maintaining enough money in your reinsurance account to cover the costs of claims or cancellations. In addition, unlike other types of insurance your customers buy from carriers, reinsurance transfers the risk related to warranty claims directly to your own reinsurance company.

A key benefit of a dealer’s reinsurance company is to hold required reserves in excess of claims and cancellations in a tax-advantaged manner. Establishing a reinsurance company also allows the dealer to keep a greater share of the profits generated from the F&I products that they sell. In addition, when a dealer is running his or her own reinsurance company, the funds can be used to enable a number of financial transactions, such as the acquisition of new dealerships, investment in real estate, or as a factor in their own wealth planning.

Running your own dealer reinsurance company potentially gives you more control over customer satisfaction. For example, without a reinsurance program of their own, dealers often sell their warranty service contracts to a third party, who then has control over whether or not to pay on specific customer claims. However, if such as third-party company decides not to pay on a particular customer’s claim, that customer could easily assume it is their dealer who is denying the claim. But with your own reinsurance company, you’re in charge of how insurance claims against the warranty are handled. That means you have greater control over not only the customer’s experience with the warranty process, but also their likelihood of being a repeat customer.

Disrupting the status quo

Until recently, dealers had basically one option for their reinsurance: a program set up and managed by their vehicles’ manufacturer. For many dealers, the manufacturer’s reinsurance programs did what they were supposed to do in terms of covering the costs of covered warranty work.

What the manufacturers’ reinsurance programs didn’t do was to treat the funds in the reinsurance account as an asset of the dealer. Manufacturers essentially gave dealers little choice in terms of investment vehicles for the funds in their reinsurance accounts. Consequently, dealers’ potential to grow an asset was limited when compared to the potential returns from investing in equities.

More recently, some third-party companies have begun offering options for dealers, allowing them to invest their reinsurance funds according to their own risk tolerance and financial needs. This approach has given dealers a new set of questions to consider, including which companies to work with to establish and manage the specialized accounts that give them greater control over their funds.

One of the realities of the new reinsurance landscape is that not all financial advisors are equally capable of setting up the specialized accounts needed to manage the reinsurance assets. Some advisors have a great deal of expertise about investing in general, but they may be less familiar with the specific tax and compliance requirements concerning reinsurance.

The impact of working with trusted partners

An element that is often missing in companies that administer automobile dealer reinsurance programs is a mindset that treats the reinsurance assets as the dealer’s own cash. That’s where choosing the right reinsurance program administrator can add a great deal of value — especially when the dealer’s team also includes an investment advisor who understands the intricacies of working with reinsurance administrators and their policies.

For many dealers, the benefits of establishing their own automobile dealer reinsurance company are clear. Often, the challenge is that they lack an experienced financial partner with the expertise needed to set up the requisite accounts, and guide them through the financial decisions that may benefit them in the long run.