Many dealers do not form their own reinsurance companies because they are not familiar with the benefits or are fearful of the risks. Our firm suggests that all dealers consider forming their own reinsurance companies. Some dealers may not be candidates if they sell fewer than ten extended service contracts a month or if they represent certain luxury brands.
After several years of discussing the topic, I recently had a client form his own reinsurance company. Prior to making the decision, I mentioned to the client that I would not bring up the subject again, but my final statement was: “If you are telling me that you don’t want to form your own reinsurance company, you are also telling me that you don’t want an additional $200,000 net of claims deposited into a brokerage account on your behalf.” The $200,000 annual accumulation of net profits is a good estimate for a dealer that sells approximately forty extended service contracts a month.
A dealer who is struggling in this current economic environment does not feel as discouraged if he/she is accumulating $200,000 outside of the dealership in his/her reinsurance company. With the current economic environment, many dealers need an injection of cash. The credit markets are virtually closed and dealers can not obtain working capital from traditional financing sources. A dealer’s reinsurance company can lend the dealership earned premium to provide necessary liquidity.
A dealership typically increases its profits after the dealer forms his/her own reinsurance company. The service and parts business increases as the service contract generally requires local customers to return to the dealership for the warranty work. Additionally, the dealer is motivated to sell more F & I products when he/she sees the premium accumulating in the reinsurance company.
The typical products sold are new and used vehicle service contracts, life and disability credit insurance, certified used vehicle plans and anti-theft and chemical systems.
The reinsurance company engages a management company to create the program, set up the corporation, administer the claims, provide accounting services and prepare tax returns. Most importantly, the management company will send in professional F & I consultants on a weekly or monthly basis to train your staff and monitor your programs. Reinsurance companies should not be pooled with other dealers. Also, the company should not be sharing profits with a manufacturer or large insurance company.
In conclusion, dealers are subject to economic and product risks that make the business financially challenging at times. Consider forming a reinsurance company and take advantage of the financial rewards that it offers. We have several clients who have reinsurance companies with millions of dollars of earned premium. Why would not you take advantage of that opportunity?
Downey & Company, LLP specializes in management, finance and taxation of automobile dealerships. For more information, please call Paul McGovern at 781-849-3100 or email to pmcgovern@downeycocpa.com.
