“You Don’t Sell Someone Else’s Cars, Why Sell Someone Else’s Warranties?”
I have been in the car business for over 30 years. Going from dealership to dealership, I have seen the good, and the bad. There are car dealers who are on top of their game, and always striving to improve. Then there are the dealers whose computer screens would still be green if they had not finally pooped out.
This message is for those dealers who are striving to be the very best. There are many aspects and levels of car dealers. There is the guy who pounds the pavement to sell the cars and the guy whose name is on the sign. There are the dealers who rent their building and those who own it. There are dealers who floor plan their cars and those who own their inventory. There are those who depend on the Finance Companies and there are others who own the Finance Company. Some own their service department and others must depend on an independent repair facility. There are also those who depend on third party warranty companies to warranty the very thing that they have staked their livelihood and reputation on – the automobiles they sell – and those who own a Reinsurance Company.
Let me make it clear, I am not writing this to sell you a warranty. I am not here to tell you, like those 20 guys that stalk you every day, that I have the best coverage, lowest priced, Ten year-Unlimited Mileage-Bumper-to-Bumper for only $395, Warranty. I’m here to tell you why you need to own a reinsurance company. Of all those things I mentioned: owning your service department; your building; your inventory; or your finance company, a reinsurance company can provide you the highest return for the least amount of capital investment, of any of them.
First, let me tell you how this works. The basics of all warranty companies are the same. What is covered is disclosed and priced, based on actuarial figures. That price dissected, includes what we refer to as an “Admin fee”. The admin fee consists of: fees to the administrator who administers the warranties and adjudicates claims; a fee to an insurance company to insure it; a fee to the agent; and a fee to the roadside assistance company. The total of the admin fee is usually 20% or less of the cost of the product. The balance of the cost of the warranty is the premium reserve. Premium reserve is set aside to pay claims. What happens to that reserve is the major difference between whether you own your warranty company or a third party does. Most warranty companies absorb any earned reserve (not used to pay claims) as underwriting profit. A warranty contract is earned based on the term. Example: 12 month contract earns 1/12th per month. Some warranty companies have what they call a retro or profit participation program. They will return a portion of the earned reserve to the dealer if the dealership produces x number of warranties and continues to do business with them. (So, if the dealer sells the store, retires or falls below a volume requirement, the warranty company is not obligated to continue including the dealer in its profit share.) If the dealer does receive a profit share, they will also receive a 1099 from the warranty company on what is considered commission, normally having the highest tax consequences.
The reason why you should consider owning a reinsurance company is, it is an easy way to expand your profits. As you can see, third party warranty companies profit from reserves not used to pay claims. Reinsurance allows YOU to make that profit. Any reserve not used to pay claims becomes underwriting profit. As an example, if you sell an average of 20 vehicle service contracts per month, and $800 goes into reserve from each customer’s Vehicle Service Contract (loss ratios vary), but for this example let’s say, $400 or 50% of every contract on average is used to pay claims. This leaves a $400 underwriting profit, which is $96,000 in additional dealer (stockholder) net profit per year and $480,000 additional dealer net profit at the end of five years. This does not include the retail profit made from the sale of the Vehicle Service Contract. If you sell third party vehicle service contracts now, the earned reserve is retained by the third-party warranty company as their underwriting profit, in this case $96,000 per year.
Another great reason to own a reinsurance company is reinsurance companies are small Property and Causality companies. “Small property and casualty insurance companies with less than $2,300,000 in annual net premiums may elect to be taxed only on investment income under Internal Revenue Code 831 (b).”
Most larger car dealers own their own reinsurance company. Smaller dealers can be unaware of the benefits and have the misconception that you must be a large volume dealer to make it work.
There are many products available whether you are a Retail, BHPH or Franchise Dealer to fill your reinsurance trust account and make taking care of your customer easy. Products that fit your individual needs such as Collateral Protection Insurance (CPI), Debt Cancellation Coverage (DCC), Vehicle Service Contracts (VSC), Limited Warranties, and numerous ancillary products.
With a Reinsurance Company, you have Nationwide Warranty Coverage, paid for by your Customer. Accounted as a dealership expense. Allowing control over policy design. With a New Profit Center that is Income Tax Friendly, to say the least.