Thank goodness it is finally summertime and we are selling cars like candy bars. Public transportation is not as popular as it once was and folks want their own ride, and we are here to make that dream come true.
What have we learned besides Uncle Sam can print a bunch of money during this crisis? We have certainly learned that perseverance pays off and to be a good Boy Scout by being prepared. We also learned that customers’ cars continue to break down and insurance continues to lapse.
Some of you out there have had to take a lot of this on the chin. Dealers that own their own reinsurance companies had warranties on their cars and the funds available to repair those broken cars. They also had the means to place insurance on those vehicles where the insurance had lapsed.
As many of us have discovered, prior planning prevents poor performance, including - and most assuredly - during a worldwide crisis.
For those of you who didn’t have the means to place insurance on vehicles with lapsed coverage, you might have had to eat a few. Wow, how many insurance premiums could one make before it added up to the ACV on one vehicle?
I know that some of you paid a third-party insurer to place Collateral Protection Insurance for you, and they did…for 100% of the premium and underwriting profit. Now, that my friend, is social distancing yourself from what could be additional profit for you. With a reinsurance company, you collect the premiums from your customer and what is not used to pay claims, … your customer’s claims, … becomes underwriting profit. For example, if you collect (over a year’s time) $200,000 in premium and if you have $93,000 in claims, then your underwriting profit would be $107,000. With a third-party insurer you would have paid the same $200,000, and your claims would have been paid, but the difference is the third-party insurer would have retained that $107,000 as their underwriting profit.
The same principle applies to warranties.
Now, there are many different products you can use to overcome the pitfalls we all face in the BHPH business. Let me explain by asking a question: When your customer has a total loss and there is a balance remaining after their insurance pays, do you go after them for that balance? Most dealers answer no, and rightly so, because we are in the payment producing business and it is best to get them in another car as quickly as possible and get them making payments again.
By doing so, however, you are giving them FREE GAP. I repeat FREE GAP. Why not SELL them GAP at the time of sale and put that premium in your own reinsurance company? Then you would be paying your finance company with your customer’s money for those outstanding balances you are eating right now, and you keep all the premium that is not spent in claims. Again, an example (simple math): Multiply $400 by the number of cars you sell in a year. This is approximately the revenue you could bring in, without interest, for GAP. To be clear, you likely forgave those same loan balances last year that you would forgive going forward, but before you collected ZERO GAP revenue. No brainer, RIGHT? This is only an illustration of opportunity that you have, not every customer is going to buy GAP from you, but most will! If you are using a third party for GAP, as a BHPH dealer, I would suggest you consider reinsuring your GAP because your current provider’s interests do not align with yours. They want to avoid paying you.
Some of the other re-insurable products you can use to help your BHPH business overcome pitfalls include: Limited Warranties, Vehicle Service Contracts, GAP, Collateral Protection Insurance (CPI), Debt Cancellation Coverage (DCC), and Loss Damage Waiver for LHPH. All these products can help overcome those inherent difficulties we face in this business. They need not be a cost of business but can certainly be a profit center and a capital resource. Be prepared the next time we face uncertainty. Give your business the tools and resources it needs to make it through tough times. There is certainly no need to social distance yourself from additional profits. Let me close by saying Congratulations. Glad to see you made it. God bless, Tim Byrd
It’s what smart dealers do.