One type of service contract program available to dealers is a dealer-owned warranty company. But as an agent, knowing what that is and how it works, and how it will effect the dealers you sell it to, is important. Mark Macek, president, United States Warranty Corp., addressed attendees at Agent Summit 2013 in March, educating them on what, exactly, a dealer-owned warranty company is, and how it benefits the dealers.

In this type of structure, the dealer actually forms a separate c-corporation structure, apart from the dealership itself, for the sole purpose of writing service contracts. The new entity, owned by the dealer, then becomes the obligor, and in a sense, the actual provider. In Macek’s case, U.S. Warranty handles all of the back-end functions and takes an admin fee out of each contract for that purpose. It’s important to note, however, that depending on the provider the dealer sets the reinsurance program up with, how those fees and taxes are handled can differ.

“This is their company, they own it,” said Macek. “We don’t touch their funds; all funds flow through the dealership. So things like coverage, rates, etc. are all controlled by them, based on the underwriter’s approval”

Basically, the dealer gains the ability to control every aspect of the service contract, from what coverage is offered, to what the rates are set. “We tell dealers to make it better than the factory warranty, or what’s currently on the street,” Macek said. Examples include offering first day rental, or providing extended rental terms. This entices the customer to buy the dealership’s contract over another option.

And that’s important, because at the end of the day, it’s a way for the dealership to increase profits. Macek gave an example of an $1,800 policy. Of that, $900 would go to the dealership as profit. Another $900 would go back to the warranty company the dealership owns, because in this case, it is a separate entity. Of that money in the warranty company account, a small amount would go to pay U.S. Warranty’s admin fee, and the rest would be profit after claims are paid. The money is then earning compound interest while in the investment account. The dealership warranty company can then use that profit however they wish, from loaning it back to the dealership, taking out dividends, etc. It can even be used as part of an incentive program to help keep managers or key F&I personnel attached to the dealership, giving them a stake in the warranty company and it’s profits.

In the end, rather than have the profits controlled by an outside party, this structure allows the dealership to have complete control over the cash, and complete transparency as to where that cash is invested. It gives dealers looking for a hands-on approach a great way to manage their own program. And it doesn’t have to just be service contracts. Macek pointed out that other products, like prepaid maintenance, or dent and ding, could easily be fit into this structure as well.

“It’s about more profit, and more transparent transactions. It’s a beautiful thing,” Macek said. For more information about dealer warranty corporations, e-mail mmacek@uswarranty.com.