Use It or Lose It

Nothing Happens Until Products are Sold

Hello everyone! Robby here at The Dealer Reinsurance Specialist podcast. Today’s episode is called ‘Use It or Lose It’. If this sounds self-explanatory and simple, you’re right. We could probably end the podcast now with a thank you for listening to another episode of The Dealer Reinsurance Specialist podcast…but we won’t.  

Use it or lose it is a very simple concept - It means that nothing happens until products are sold. Reinsurance is amazing, but it’s not magic, so dealers need to continue to offer aftermarket products to their customers. It’s the simpleoffering of products that we’ll discuss today. 

A few weeks ago, I attended a quarterly cession meeting with a newer affiliated reinsurance company (ARC) that had been established less than a year ago. Once again, a quarterly cession is an in-person review of an ARC’s financial statements. The ARC in question, consisting of two independent used car dealerships, started off great, but production dropped off significantly during the most recent quarter. This resulted in a two-and-a-half-hour meeting - Longer than normal, but the perfect amount of time for us to discuss what was needed. During my six-hour drive home two thoughts consistently ran through my mind. One, trust the process and two, improve communication. 

Why these two thoughts? Well, the lack of production was not due to an uncontrollable, outside force, but rather an internal decision by the owners to stop offering their products despite an extremely profitable ARC that was easily outperforming anticipated loss ratios. Both thoughts suggested a lack of understanding. 

In my experience, a lack of understanding always results in an opportunity for improved communication. Here’s the deal - Reinsurance is both simple (the concept) and complex (all the details), so finding the perfect balance between too little and too much information is often challenging. Unfortunately, an error to either side results in the same missed opportunities for our dealer clients. In my defense in regards to this particular situation, I hadn’t realized the misunderstanding until the cession meeting, so the judgement of my communication effectiveness will ultimately be decided during next quarter’s cession meeting. For the dealer’s sake, I hope I pass. 

That said, this situation helped me realize that reinsurance information may be better received in smaller, more manageable portions…and from a variety of content options. This resulted in The Dealer Reinsurance Specialist being created to help in this regard. The podcast is for auditory learners, the blog for read/write learners, the infographics for visual learners and the daily social media posts through Twitter & FaceBook, as well as, the ability to ask questions through the website at www.thedealerreinsurancespecialist.comor by email to me at [email protected]is for kinesthetic learners. Please use whatever learning style best suits your needs and let us know how we can improve your experience moving forward. 

In this particular case, a lack of understanding also resulted in not trusting the process. The ARC had developed a plan, executed the plan effectively and then veered from the plan. 

The original plan was to offer three products - service contracts, GAP and a limited warranty. This plan only covered the basics, but had been working brilliantly up until the quarter in question. On a side note: Any plan is better than nothing as NIADA membership data reports state that 44.3% of independent used car dealers currently DO NOT offer service contracts or warranties and 73.8% don’t sell aftermarket products at all. This accounts for a lot of customers with limited or no options to mitigate their risk and dealers missing out on not one, but two crucial revenue streams in the form of aftermarket product sales and reinsurance as a profit center. 

Regardless, this ARC’s production was down across the board with only service contracts currently being remitted. Remitted just means a transfer of money, so only service contracts were being sold and therefore only those premiums were being deposited into the ARC. The reasoning behind this? A down market and fewer opportunities to sell service contracts per our conversation. Let’s put a pin in service contracts for now and move onto GAP. 

Zero GAP production. Why? A fear of its volatility. The owners felt that GAP was too risky to reinsure, so they stopped offering it to their customers. Now GAP is certainly unpredictable, which can be perceived as volatile, but it provides no more risk in regards to legal exposure or financial loss than any other reinsurable or ‘walkway’ aftermarket product. For clarification, a ‘walkaway’ product has no association to the dealer – The provider sells it to the dealership who marks it up and sells it to a customer while the provider carries the underwriting risk and earns the premium and investment income. 

Okay. So, back to exposure and financial loss. Let’s remember what we’ve learned so far. Reinsurance is insurance for insurance companies – It transfers risk from the ARC to another insurance company who bears legal responsibility. On top of that, a few providers - very few actually - also take things a step further and insure each product individually, creating a firewall that provides 100% stop loss protection PER product. Meaning that losses (claims) of more than 100% from one product CANNOT affect – or be paid from - another profitable product. Therefore, if GAP losses happened to climb over 100%, the insurance company, not the dealer’s ARC, would be on the hook financially. So, both reinsured and walkaway GAP provide the same, zero, risk to the dealer. There’s literally no benefit to offering walkaway GAP over reinsured GAP and that’s without considering that the walkaway GAP is a dealership expense while reinsured GAP is a personal asset that earns underwriting and investment income. Make sense? I hope so because the ARC in question had began offering walkaway GAP despite a 100% return (0% claims/loss ratio) on six months’ worth of reinsured GAP business. Only a lack of understanding or trust in the process would cause that. Let’s move on. 

Zero warranty production. The limited warranty was no longer being offered as well. The explanation was that the product wasn’t beneficial because repairs were handled internally and having to remit premiums meant less cash on hand. Valid concerns, but things aren’t always as simple as they seem. That said, I may be biased because the limited warranty is my favorite product. It’s like having a favorite child, I suppose. Like me to my mother - Sorry brothers. Why is it my favorite? This warranty is one of the few products that actually generates additional business along with its other benefits. Don’t get me wrong, all products are great, but most others serve a singular purpose – Service contracts cover listed repairs, GAP the difference between the loan balance and insurance settlement, etc. The limited warranty, however, is multi purposed. The warranty is inexpensive, has extremely low loss ratios and earns out in months, instead of years. Meaning the dealer instantly has surplus at his or her disposal, which is better than cash on hand because it’s earning investment income in a tax-sheltered environment that also allows the ARC the ability to loan itself money for any reason. Pretty cool, right? Besides that, the warranty buyer’s guide that’s placed on the car windows informs customers that a warranty is included and that the unit is not “as is”. This results in 17% more used car sales. Along with this increase, dealer’s using this warranty also sell 26% more service contracts because the warranty allows a natural conversation toward extended or more expansive coverage. 

Including the warranty also allows dealers who handle repairs internally to recoup some of the expenses. Now warranties are provided, not sold, but a slight increase in the car price is a reasonable expectation for a customer’s piece of mind.  

Remember the pin we placed in service contracts? Could the perceived down market and fewer opportunities be the result of no longer offering the limited warranty that generates additional used car and service contract sales? Maybe. Maybe not. At the very least, it could have improved the figures. Let’s think about this. Using the NIADA membership data again, the largest block (29.5%) of independent used car dealers sell 0-100 units per year. If an ARC sells 100, that’s 25 per quarter – Offering the limited warranty would increase that by 4 per quarter. 29 sold units instead of 25. The largest block (45.6%) of independent use car dealers sell 1-5 service contracts per month. If an ARC sells 5 per month, that’s 15 per quarter – Offering the warranty would increase that by 4 per quarter. 19 sold service contracts instead of 15. Actually, it would be higher than that because the dealership would sell their average amount plus the 17% increase of service contracts on the 4 additional used car sales per quarter.  As you can see, this warranty produces a snowball effect.

Hopefully, these cession details will reduce some of the misunderstandings surrounding reinsuring products because miscommunication and/or a lack of trust in the process can prove costly. Let’s make things simple. There’s no reason not to offer reinsured products. They are much better and no worse than ‘walkaway’ contracts. So, use it or lose it because nothing happens until products are offered and sold…and your family’s financial future may depend on it.  

Let’s recap:

• Use it or lose it
• Nothing happens until products are offered/sold
• Trust the process
• Improve communication
• Reinsured products provide no more risk than walkaway products
• There is no reason not to offer reinsured products

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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