Treating Dealer Reinsurance as an Additional Profit Center

A new year is the perfect time to build a forecast for what your business can achieve if you do more of the good things and stop the practices that are not getting you closer to your goals. That means evaluating the performance of all the different profit centers of the dealership: new car sales, used car sales, finance and insurance (F&I), parts, service, and, if applicable, the body shop. That careful assessment helps dealers forecast the growth expected from each department and identifies investments that could accelerate that growth.

While it may not expressly be a profit center, a dealer's reinsurance or F&I participation program is directly impacted by the performance of every other department. Changing a dealer's perspective to start viewing reinsurance and participation programs as additional profit centers creates a more significant opportunity to add to overall performance.

As we navigate 2022, here are some areas that you should consider in consulting with your dealers about how to optimize performance to reach their goals.

GROWTH IN SALES = GROWTH IN REINSURED PREMIUM

It seems like a natural correlation: the more new and used cars a dealership sells, the more F&I products it can also sell. On paper, that results in an increase in premiums reinsured and more potential profit. But while the lift in F&I from increased volume certainly contributes to the growth of a dealer's reinsurance program, there are other ways to increase both sales and reinsurance profitability with a single strategic decision. 

Let's look at a few of these opportunities.

Perform an early, active trade walk and train sales how to advocate for F&I. By properly performing a trade walk, we demonstrate to customers that we are interested in helping them find more value in their trade vehicle. At the same time, sales should begin to build the value of the F&I products that customers will learn about later in the process. When customers feel like they're receiving the best value for their trade, we're more likely to win the sale. And by advocating for F&I early in the sales process through a real-time demonstration of value, we create increased F&I opportunities. 

Imagine a customer coming to the dealership with a trade-in vehicle that has a broken window regulator. If the salesperson reviewing the trade with the customer identifies this as a reason for reducing the amount the dealership can pay, they've just created a defensive customer. But suppose we acknowledge that the customer's window is not working correctly and ask whether they purchased a vehicle service contract that may cover the repair and increase trade value. We now have a customer who feels that we're looking out for them. And if the customer does have an active vehicle service contract to cover the repair, we now have a happy customer that learned first-hand the value of that coverage. This happy customer is more likely to purchase a service contract for their next vehicle. But even if the customer did not have an active vehicle service contract to pay for that repair, we have demonstrated the value of purchasing a vehicle service contract in a way they will remember when they get to F&I.   

Offer advantage sales programs that build value in your vehicles. It is often said that there is only one low-cost provider in each market. Increasing sales by developing a value package that differentiates your dealers from others in the market is an effective sales tool to overcome that truth. But advantage programs can also create increased opportunities for a dealer's reinsurance program. 

An advantage sales program may include one or more products that come with the purchase of the vehicle — products that can later be upgraded in F&I. Common examples of such programs may include complimentary key replacement, dent repair, a bundled product offering, or even a lifetime engine or powertrain program. This increased F&I opportunity, coupled with the ability to reinsure product reserve on every vehicle sale, creates a compelling growth strategy for reinsurance.

Create consumer confidence by offering used car limited warranties or third-party certifications on used vehicles. Limited warranty programs provide peace of mind for customers buying a used vehicle, but they can also be reinsurance superchargers because of their short earn-out periods. Stores with robust reconditioning processes will also generally be solid loss performers. 

SYNCHRONIZE F&I DEVELOPMENT AND REINSURANCE

Not accounting for the recent impact of the current inventory situation on dealership gross profit, growth in F&I has been a primary driver of dealership profitability for the past several years. Increasing penetration rates and PVRs in F&I has been the rallying cry in dealerships, and there is still room to grow. Almost every dealership builds a plan for increased profitability in F&I at least annually; however, in most instances, that development plan does not account for the resulting effect on a dealer's reinsurance position. Building an F&I development plan that synchronizes the dealership's growth and profitability plans with reinsurance performance is a win/win. 

A couple of things to consider are:

Disassociate the term of financing with the term of F&I products sold. Just as average transaction prices have continued to rise, finance terms on vehicle purchases have steadily increased over the past several years. Extending the loan term on a vehicle purchase generally happens because the customer is working towards a payment that fits their budget, not because they intend to own the vehicle for longer. Far too often, the inclination is to match the term of F&I products sold with the extended financing terms. As a result, we are overselling coverage for terms that go beyond the customer's intended ownership period.

From a sales and F&I perspective, this adds additional payment pressure to the budget. From the reinsurance side of the ledger, longer contract terms take longer to earn out, potentially slowing future distributions of profit from the dealer's reinsurance program. A more realistic (and profitable) approach for F&I focuses on disassociating the terms of financing and the terms of vehicle protection products sold. 

Offer higher deductibles. We live in a world where most of us are comfortable with the concept of deductibles or copays. From homeowners or auto insurance to medical plans that require copays for doctor visits or prescriptions, we all manage the amount we are willing to pay to protect ourselves by choosing the appropriate deductible. Similar to the concept of shortening terms discussed above, presenting customers with options for increased deductibles on vehicle protection products helps them manage their monthly budget. A higher deductible product will cost less. And for a dealer's reinsurance program, an increase in the average deductible sold typically has a positive impact on the frequency and the severity of claims charged against reinsured reserves.

Focusing on these two F&I strategies creates a proposition that works for customers, F&I departments, and dealer reinsurance positions. Shorter contract terms and increased deductibles reduce a customer's overall monthly payment and can also open the door for purchasing an additional product to extend their protection. From an F&I perspective, shorter terms and increased deductibles are less expensive and potentially more profitable, creating other F&I opportunities. Trimming the term of products also increases the rate of earn-out of those same products in reinsurance.

PROSPECTIVE CHANGES CAN HAVE RETROACTIVE IMPACT

In the ultra-competitive job market that we are currently experiencing, it is not uncommon for dealers to increase both warranty and labor rates to offset higher costs. If a dealership's overall strategy and budget are based on an increase in labor rates, it is important to consider the potential impact these changes will have on reinsurance performance. 

It's simple. An increase in a dealership's labor rate increases the severity of a claim and will likely impact the loss ratio performance of the dealer's reinsurance program. Notably, the impact is not limited solely to business sold and reinsured on a prospective basis. It also directly impacts active business written and reinsured in previous periods. Consider too the impact of inflationary pressure on parts pricing. While changing the amount of reserve ceded to reinsurance in the past is not a possibility, considering the appropriate rate and reserve necessary to withstand these pressures going forward is critical to the overall performance of a dealer's reinsurance program. 

For maximum profit, reinsurance cannot be viewed as the ancillary result or byproduct of what happens in other areas of the dealership. Actively consulting with your dealerships to understand their sales and operating plans will result in the best opportunity to drive growth in a dealer's reinsurance program. If managed cohesively as part of the strategy and direction of the dealership, a high-performing reinsurance portfolio can be a lucrative profit center for the dealer.

David DeCredico joined APCO as vice president for reinsurance programs in 2004 after spending the early part of his career in Public Accounting. After managing APCO’s business development team for several years, Dave took on the role of senior vice president of wealth building and strategic accounts in 2021.