Dealer Reinsurance Company Responsibilities

No Work, Big Reward

Hello everyone! Robby here at The Dealer Reinsurance Specialist podcast. Today’s episode, Dealer Reinsurance Company Responsibilities, will explain a dealer’s responsibility in regards to an Affiliated Reinsurance Company (ARC). It’s really quite simple – Although an ARC is a life changer, it won’t change the daily life of the dealer. This means that the majority of the ARC responsibilities are (should be) managed by the administrator (provider), not the dealer. 

When it comes to the functionality and management duties of an ARC, there are only three major players, two of which are the dealer, but today’s conversation will break down an ARC’s responsibilities into four categories. 

• Dealership
• Insurance Carrier
• Reinsurance Administrator
• Dealer Reinsurance Company (ARC)

Don’t worry, despite 50% of the equation belonging to the dealer, the ARC responsibilities are minimal. 

Category One - The Dealership 

At the dealership level, nothing changes. The dealer continues to offer and sale all F&I products just like mentioned in Episode 3 - Use It or Lose It. Nothing happens until products are sold because the premiums received from the sale need to be deposited into the ARC in order to earn underwriting and investment income. So, No Sales = No Premiums = No Deposits (Remits) = No Underwriting or Investment Income. It really is that simple. That said, partner with a provider that allows ALL products to be reinsured, because sales of products three through five can really move the needle for an ARC. 

Okay, so despite no increase in dealership work load, the dealer receives additional benefits like claims involvement & override authority and net remit of claims & cancellations while still receiving 100% commission on product sales, the ability for dealer packs & overrides, etc. It’s a classic win-win scenario. 

The only duty required of the dealer in this category is to continue to offer and sale products. Those not doing so will need to make that minor change, which is well worth the effort – It provides customers with important products and the dealer the opportunity to capitalize on back end and reinsurance profit. 

Category Two - The Insurance Carrier

This is where the reinsurance magic happens because without an insurance carrier, reinsurance would not be possible. Remember Episode 1: Turn a Dealership Expense into a Personal Asset? We discussed that reinsuranceis insurance for insurance companies. It’s a form of risk transfer that allows one insurer, the dealer, to transfer risk to another insurance carrier who bears the legal responsibility. 

In regards to an ARC, the insurance carrier handles all the insurance related duties - bears legal responsibility, provides underlying insurance, covers stop loss, state compliance, premium tax, issues policies, lender approvals and reserve postings. Whew! That’s a lot of work, stress and anxiety removed from the dealer’s plate. 

Category Three - The Reinsurance Administrator

The administrator coordinates and manages all aspects of an ARC, including the interaction between the dealership/dealer and the various third-party industry experts such as the insurance carrier, wealth manager, CPA, etc. The administrator duties include claims adjudication, risk analysis, financial consulting, tax return preparation, financial reviews (cession reports), record keeping, financial statements, loan & dividend administration, coordination of trust account deposits, etc. That’s a double whew! Another large chunk of work not required of the dealer or their business manager, their CPA, their attorney, etc. The dealer is not responsible for any administrative duties. 

Category 4 - The Dealer Reinsurance Company (ARC)

The dealer, at the dealer reinsurance company level, is required to…attend an annual board meeting. 

That’s it! Attend an annual board meeting and receive 100% of the profit (underwriting and investment income). It means lower federal and state tax rates, only being taxed on investment income, plus all the other benefits and features associated with owning an ARC that were mentioned in Episode 2: What ‘Should Be’ Available in a Reinsurance Structure. 

Conclusion

If the dealer’s ARC responsibilities seem non-existent and simple, you are correct. The dealership changes nothing and the dealer attends an annual board meeting – Everything else, ARC related, is handled by the administrator and the insurance carrier. Now, the lack of additional duties for an ARC is an amazing benefit, but it’s also a lot of responsibility that’s being farmed out to your reinsurance partners. Make sure that they are up to the task and establishing an ARC is well worth the effort to turn a dealership expense into a personal asset that becomes a profit center rivaling anything else a dealer owns. 

Let’s recap:

• Nothing changes at the dealership - Continue to sell all F&I products 
• The insurance carrier bears legal responsibility & handles all insurance related requirements
• A reinsurance administrator coordinates everything and everyone in relationship to an ARC
• The dealer reinsurance company (ARC) attends an annual board meeting & receives 100% ownership control & profit, plus a whole host of other amazing benefits. 

News: A recent report titled ‘IRS turns the heat up on taxpayers participating in micro-captive insurance transactions’ has caused a bit of a stir within our industry. Straight to the point - This doesn’t pertain to any of our (the company I work for) clients and also shouldn’t affect those associated with other dealer reinsurance manager/providers either. 

The report is in regard to IRS-IR-2020-26 – January 31, 2020, the IRS issued a bulletin regarding the current status of its efforts directed at abusive captive insurance arrangements of the sort identified in Notice 2016-66. This notice is related to the well-known problems with enterprise risk captive insurers that lack many of the attributes of insurance, such as proper coverage, timely payment of claims, etc. and have a completely different structure than what occurs in dealer reinsurance.

Our company believes that there will be little, if any, impact of this bulletin on the F&I industry as we have successfully handled several IRS audits involving auto F&I insurance (dealer reinsurance) issues since the inception of Notice 2016-66. 

In fact, we believe that reputable F&I providers should actually welcome this development, especially a company like ours as the safe move is to align with the one program that already has IRS approval. 

Recap: This report is not dealer reinsurance focused – That combined with an IRS approval and over 30 years of experience in this space, should ease the mind.      

Well, that’s it for today’s episode of The Dealer Reinsurance Specialist. Thanks for listening and please join us again next week for a brand-new topic. Please make sure to direct any questions or share any feedback to our website. We’d love to hear from you. Thank you…and enjoy the day!

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