As a 30-year veteran of the automotive industry, I wanted to share some thoughts on the complicated subject of reinsurance. With more than 55% of all dealers in the U.S. already involved in reinsurance and 20% being involved in retro participation programs, there’s no better time for a reinsurance checkup than now!
Ensuring your dealer clients are taking part in an annual reinsurance checkup is as important as an annual physical. An annual reinsurance checkup can identify the overall success of the reinsurance program, identify and prevent problems, chart progress, and outline the action plan to achieve financial goals and objectives.
At this point, you already know that owning one’s own reinsurance company is about control — controlling cost, controlling claims experience with your customers, controlling the money, and, to some extent, controlling the investments. It can also provide motivation for necessary changes in dealerships as it relates to performance.
Many find the prospect of forming and starting their own reinsurance company stressful. They are happy to get it up and running but assume it will be on autopilot after the launch of the program. Dealer reinsurance companies should be analyzed in the same manner as a 401(k), SEP, IRA, or any other financial services product.
Below are eight steps you can take to help your dealers maintain a healthy reinsurance formation. Please note this is not financial or legal advice. Seek proper counsel for any questions.
1. Track Product Performance.
You must understand the profit margin performance of the “widgets” — the F&I products that are ceded into a reinsurance company.
Just as an evaluation of an F&I manager’s performance would consider whether they are selling the VSC at cost or making an acceptable profit margin, the margin performance on your dealer’s reinsurance program should be reviewed.
Are margins after claims and expenses below or above average? If the net profit margin in their reinsurance company is $435 per VSC, and the industry average is $455, will you be OK with below-average results at $435, or does making an adjustment to be average or slightly above average make more sense?
In my opinion, a profit margin of approximately 10% above average is attainable long-term and maximizes the wealth-building strategy for the dealer over time. Performance data can be sourced from the various OEMs, third-party administrators, or, in some cases, NADA or NIADA.
2. Connect Reinsurance to F&I Development.
F&I performance is crucial in any profit participation program! I realize all your dealer clients focus on F&I performance, especially in a tight market. Before reinsurance, F&I performance helped make more money in the dealership, and it continues to do so. But poor performance for the dealer who owns a reinsurance company can detrimentally impact profits!
They now have control of front-end and reinsurance margins after claims and expenses. F&I performance directly impacts the funding of the reinsurance company.
In practical terms, if the F&I managers in the dealerships you do business with are at 30% VSC penetration, a 20% improvement would have a significant impact on reinsurance performance.
Using my prior example, a dealer selling 100 pre-owned and non-lease new units per month would be missing out on 20 VSCs per month or 240 VSCs per year at a profit margin of $435. That’s $104,400 a year or $1.04 million over the next 10 years.
Investment income is not an included variable in this calculation. The long-term impact after 20 years could be north of $2 million in net profits to the reinsurance company.
As you can see, a small adjustment can mean significant wealth long-term to the dealership. Therefore, ensuring the correct F&I compensation plan is in place — and working with F&I trainers to ensure top performance at the dealership — can pay big dividends!
3. Check the Claims.
Is your dealer’s reinsurance company paying claims? When reviewing claims, we are looking to identify whether claims are paid based on mechanical failure or upsell. Each dealer will have a different perspective on this; however, most dealers do not want to see claims within the first 30 days of coverage. This can be a sign of poor reconditioning at the dealership level.
Remember, reconditioning is an expense at the dealership level. This same expense in your reinsurance company is a reduction of premium and reduced ability to earn investment income and future wealth.
Obviously, you should always pay legitimate claims and address the customer’s repair needs. This review should be looking for anomalies in claim transactions. A service advisor who is upselling non-failed components against the reinsurance company can be quite costly!
4. Monitor the Losses.
Loss adjustment expense (LAE) will vary from program to program and should be monitored. This expense usually ranges from 5% to 13% of the submitted claim amount.
When your dealer is reviewing admin fees, keep this hidden expense in mind. It can greatly impact administration fee expenditures and reduce reserves within your reinsurance company. Here is a simple example:
The service department processes a claim against your reinsurance company for $1,000. The LAE is 10% and the TPA processes the claim and debits your reserves held to pay claims for $1,000. Adding the 10% LAE brings the total to $1,100.
This will happen on every claim with LAE. The LAE will add up quickly, but it will be difficult to identify, because it is often billed together and reported as total claims paid!
5. Know Your Investment Options.
Investment income can add to the overall health and wealth of a reinsurance company. However, this is an area that has some moving parts.
Understand that the trust agreement will dictate how investments and reserves may be allocated. Investment advisors may have limited investment options for unearned premium reserves and usually will have a set of instructions from the insurer that will sound similar to this: 25% of reserves must remain in cash to pay claims and cancellations; 25% must be in conservative funds like CDs or mutual funds; and 10% in equities.
However, as premiums are fully earned, they can be invested more aggressively in a strategy that meets individual needs. A long-term goal may be to create a situation where the investment income will be significant enough to cover the monthly claims expenditures while preserving reserve premiums.
Keep in mind that, early on in your dealer’s reinsurance company’s lifecycle, this probably will not be achievable.
6. Minimize Admin Fees.
Administration fees are always a hot topic, and everyone seems to be an expert or claims to have heard from one. Well, not all admin fees are equal in the way that they are structured!
When it comes to admin fees, you get what you pay for.
Admin fees are usually broken into one of three types: no service, partial (or “light”) service, or full service. Most of us are trained from an early age to strive for excellence and to want the best. When it comes to admin fees, you get what you pay for.
As previously mentioned, most dealers find the proposition of starting their own reinsurance company to be stressful. When it comes to helping to reduce that stress, trading service for a reduction in the administration fee is not a good idea!
What exactly do admin fees cover? This is not a definitive list, but items may include claims call center, state and federal compliance, loss control, account servicing, training and development, API connections to the DMS, and menu services. In some cases, admin fees also cover premium taxes and cession fees. Just because ceding fees and premium taxes are not a single line item doesn’t mean they are not being paid from the admin fee.
Now let’s break down the three service levels:
- No service is just like it sounds. You get the quarterly cession statement in the mail, and no one is helping you to understand it or manage your account, and you can expect longer hold times in the claim centers with potentially longer processing times. I would compare this to someone off the street with no experience in the automotive retail sector deciding to buy a car dealership and hoping it goes well. Any time I have discussed a poor reinsurance experience with a dealer, I have learned their punishment was self-inflicted because they selected no service when they really need help and guidance to manage their reinsurance company! With this option, your dealer is the only person keeping an eye on the ball. There is very little backup support.
- Partial service typically indicates your dealer is working with an agent that provides light support. They will help with minor training issues as it relates to production and handle minor claims concerns. The TPA will provide light insight to reinsurance company performance, make suggestions, and aid in bookkeeping and management.
- Most dealers select full service. Why? Because the cost difference is nominal and they have full support of the agent — and the TPA. There is full F&I training and development, compliance monitoring, and claims resolution support.
The TPA may aid in menu services, etraining, F&I universities, OFAC reporting, DMS connectivity, and electronic contracting and remittance. They may also help with claims call centers that have low hold times and expedite service, a loss control department looking for issues on behalf of the dealer, and a reinsurance specialist that monitors and reviews the reinsurance company’s performance on a quarterly basis. They may even offer opinions on how to improve performance and maximize wealth.
Remember, when considering an admin, you get what you pay for. Think of it like this: Would you hire a cheap accountant or attorney to help you with tax or legal matters? Most likely not. Selecting a no service or light service option may have you stepping over dollars to pick up pennies.
7. Calculate the Cede Fee.
Cede fee is a percentage of the premiums ceded, ranging from 1% to as much as 15%. The cost will vary from company to company based on the services provided.
8. Check Your State’s Premium Tax Rate.
Premium taxes are charged based on the premiums written in a state. The state premium taxes are a percentage of the premiums paid. Some municipalities may also impose a premium tax, which would be added to the state tax. Keeping in mind that not all states have premium tax, you should check on each states in which your dealer clients operate to ensure this is a necessary expense.
Remember that you and the TPA are the coaches for your dealer’s team. The F&I folks are the quarterbacks that run the plays and drive production into your reinsurance company. Stepping over dollars to pick up pennies is a mistake. The reinsurance company could be the most profitable venture you and your dealer clients will enter.
I wish you all great success and prosperity.
Mike Haas, LPN, MPFS is assistant vice president ofsales for American Guardian Warranty Services.