Why Collateral Protection?

by Tim Byrd | June 9, 2020 | DealerRE

Mission creep. That is what the military calls it when things start to escalate outside of the previous known parameters. Kind of like used car prices.

Increased Prices = Higher ACVs.

Higher ACVs…well that has a ripple effect throughout your business, but higher ACVs also means a higher level of “Risk”, for every dealer, regardless of your marketplace niche. You are, of course, exposed to that risk. You try to mitigate it by requiring your customers carry insurance.

Industry research would indicate that as much as 50% of the BHPH books of business are uninsured and that customers put an average of $300 into insurance policies that they let lapse within 90 days, essentially throwing that money away. Many dealers have personnel assigned strictly for the purpose of making collection calls for lapsed insurance policies, financially benefitting the ungrateful insurance companies. These calls are a necessary evil to protect yourself from the risk, or at least some of the risk.

Let us lay out some real-life problems BHPH dealers face when a loss occurs:

I hear you saying, “Okay, okay I can’t take it anymore. Is there a solution?”

I’m glad you asked. I actually have a couple of them depending on your business model, and what you are comfortable with. That, and what your state statutes dictate. The inherent problems I outlined above don’t have to be your reality. There are a couple of ways to turn this around and not only eliminate the problems but increase your net profit as well.

It starts with you owning your own insurance company through reinsurance, and having a large insurance company that has your back. FYI, this is called Admin Obligor. You have three great products, GAP, Collateral Protection Insurance (CPI), and Debt Cancellation Coverage (DCC) to help you and your customers keep a good relationship with each other. All reinsured, All paid by your customers, with All premiums accumulating in your reinsurance trust account.

Let’s start with DCC. DCC is a waiver. Insured, but not insurance. For total losses only. DCC is an agreement between you and the customer that in the event they have a total loss, you will forgive their debt. Which, knowing the outcome, allows you to get them into another car right away. Assuming you want to. DCC is usually much cheaper than insurance, and is a recurring monthly payment for your customer, that can be sold at time of sale.

Let me just add, it can be said that you are not in the car business as much as you are in the payment producing business, with cars as the “vehicle” that “drives” the customer’s obligation to send you a payment. The sooner you know the outcome of a loss settlement, the sooner you can get them into another car and making payments.

GAP, like DCC, is a waiver. GAP is insured, but not insurance. GAP differs from DCC in that it is a deficiency balance waiver. Many of you give free GAP to your customers. I know this because if they have a balance owed after a loss, you usually just eat it. Insert eye rolling emoji.

CPI is insurance. The lender’s insurance. It is forced placed insurance, which means that you rightfully can place it on an uninsured loan to cover your collateral and then require the customer to pay for it to stay in compliance with the terms of the loan. It is a No-Brainer alternative to eating an uninsured loss.

Again, every one of these products has a premium that you collect from your customer that is passed on to your reinsurance company but is not additional expense to the customer. They are simply paying you the premium they would be paying the insurance company. Just like your BHPH book of business, you add new customers’ premiums every month which accumulates and grows. Only your customers’ premium goes in your reinsurance company and only your customers’ claims are paid out. As the policies expire, the premium not used to pay claims becomes underwriting profit. YOUR underwriting profit. Uncle Sam allows you to add up to $2.3 million dollars of net written premium annually and elect to only be taxed on investment income.

You can also add warranty and Service Contracts to the premium collected.

Remember, you are in the payment producing business. Put a system in place that turns your headaches into a personal profit center.

It’s what smart dealers do.