What ‘Should Be’ Available in a Reinsurance Structure

Expect More and Accept Nothing Less 

Hello everyone! Robby here at The Dealer Reinsurance Specialist podcast. Today’s episode will discuss ‘What Should Be Available in a Reinsurance Structure’, but let’s start things off with a few housekeeping items. 

Apparently, last week’s sports analogy didn’t resonate with all of our listeners - A few were lost by the swing analogy. If you guys remember, we discussed how establishing a dealer reinsurance company, otherwise known as an ARC, allows a dealer to turn an expense into an asset. The swing analogy was an attempt to show the monthly financial difference from the $12,000 expense to the $7,500 profit used in the example. To clarify further, a negative of $12,000 plus a positive of $7,500 would result in a $19,500 financial difference – Which is what I meant by swing. Hope that makes better sense. If not, refer to our website and review the additional resources. While there, shoot me a message if you plan to be at NADA this February and want to meet up for a visit. Now onto the actual episode.  

Not all reinsurance structures are created equally. Some providers ‘provide’ less than they can, or should for that matter. Ownership by the dealer means that the program manager should give the dealer every available benefit. For dealers seeking 100% ownership, control, flexibility, full disclosure and beyond, the following important features and benefits should be provided. Do the due…as in due diligence when choosing your provider partner. Let’s get started. 

100% stock ownership. 100% ownership means different things to different providers – The dealer should receive and maintain ownership, as well as, stock control.  

100% of the profit. This includes underwriting profit plus investment and interest income. Once again, underwriting profit consists of premiums received minus claims paid out. If you need a refresher course on underwriting profit relisten to Episode 1 ‘Turn a Dealership Expense into a Personal Asset’ or direct any questions to our website. For now, just know that some providers take part of the investment income and/or split premiums – Otherwise known as profit sharing. Providers should knowingly accept responsibility in a fiduciary role. 

Full disclosure. Contracts should be simple and straightforward. Some providers hide structure details, fees and additional costs within complicated contracts. 

No writing agreements. A writing agreement is a contract that forces the dealer to produce for a certain amount of time or be penalized. Writing contracts are about provider control – another way to limited dealer choices and true ownership as dealers are forced to continue writing or lose funds should they sell, die or stop writing premiums. This money belongs to the dealer, who shouldn’t be penalized if a change is desired. 

Minimal initial capitalization and operating costs. Both the initial out of pocket deposit required to set up the ARC and the annual operating expenses should be reasonable. A dealer also shouldn’t be required to pay anything personally once up and running. The low annual expenses, like the charter renewal and CPA tax return filing fees should come from the ARC’s brokerage account. 

IRS stamp of approval. In an attempt to keep this podcast neutral, I almost didn’t mention this as only one dealer reinsurance company – guess who works there? - in the world has had their formation, structure and filings examined and approved by Internal Revenue Service and has the TAM, otherwise known as Technical Advice Memorandum, reports to prove it. If an IRS approval is important, the list of provider options is extremely short. If it isn’t important, may you never be audited (feel the wrath of the IRS). 

No personal or dealership contract guarantees. The dealer should not be listed on contracts or bear any unnecessary responsibility. Make sure your products are administrator obligor.  

Choice of wealth manager. The broker should be a third-party fiduciary agent that allows the dealer the ability to manage investments as desired. Avoid providers that attempt to maintain control of the investments and share in the profits whether it’s by limiting investment options or by use of internal “wealth managers” employed by the provider.

No float. Some providers use the time value of the dealer’s money. This topic is a silent killer and one of my personal hot buttons, so I could ramble on forever... Just consider the ramifications of a provider delaying the receipt of your funds, so that they can use that money to earn investment returns for themselves. A provider can float money in a variety of ways, all of which means less investment income for the dealer. Dealer premiums should be ceded quickly (5 days, not 30 to 45), from written (not earned) premiums and remitted net, net. A net, net remit allows the dealer to subtract claims and cancellations upfront and send in the net difference. This eliminates dealer receivables and also the need to wait to be reimbursed by the provider 45 to 90 days later. 

No money leaves US. Dealer funds and premiums should always remain in the United States. Not all reinsurance structures are the same. A CFC or Controlled Foreign Corporation accomplishes this in a beneficial structure. 

Loans from profit AND unearned premiums. Most providers only allow loans from current profits, otherwise known as surplus. 

Dividend discretion and as qualified distributions. Distributions from surplus should be dealer decision and timing based and also taxed as qualified distributions at a long-term gain rate. There should be no yearly personal or dealership tax liability nor should it be taxed as ordinary income. 

No hidden or extra fees. Just like there are many ways to make a profit in an automotive, RV, motorcycle and power sport dealership, there are equally as many ways to do so within a reinsurance structure. Beware. 

Recognized & qualified CPA firm. Dealers should rely on qualified CPA professionals to prepare the yearly specialized tax return. Some providers will use less qualified internal staff members in this role as a way to generate additional revenue at the dealer’s expense. And when I say expense, I don’t just mean the undisclosed cost of their services…

Custom rates, terms and coverages. Dealers should be able to maximize offerings on all of the products sold or given in F&I. 100% flexibility means the dealer can customize to their specific needs. 

Ability to reinsure ALL products. Some providers don’t include ancillary products, which reduce customer solutions and affect long term profitability. Dealers should be able to reinsure the full gamut of products - Service contracts, GAP, warranties, theft, chemicals, tire & wheel, maintenance, lease, key-replacement and more. 

Fully insured products. Products should be 100% backed and insured…and managed separately to eliminate commingling of product funds and exposure to risk. 

Dealer tieback for repairs. Mileage tiebacks direct customer repairs back to the originating dealership allowing more claims control and increased service revenue. This tieback increases the average repair retention from 50% to 90%. 

Claims involvement and override authority. Some providers take ownership of the claims process and handle dealer claims as desired. Dealers should be allowed to choose their level of involvement by setting authorization levels, receiving same day GAP notifications and having the ability to override claim denials to maintain valuable customer relationships when desired. 

Dealer reference list upon request. An unwillingness to introduce prospective customers to existing clients could be cause for concern. 

Provider track record. Why not benefit from a relationship with a proven reinsurance manager that has experience and can efficiently handle every part of the process from formation to ongoing advice?  

Detailed financial reporting. Some providers disappear after “earning” a dealer’s business. Others are industry leaders that appear in-person quarterly for in depth cession meetings that maximize production and profitability. I’m a tad biased here as quarterly reporting is what I do in my role as a Reinsurance Specialist – Don’t worry, I’ll ramble on about cession meetings in a future episode. 

Trusted ally. A provider should serve as a valued advisor and partner who puts the dealer’s best interests first – A supportive role. Use someone who knowingly accepts fiduciary responsibility. 

This discussion was meant as an overview of what’s available in a reinsurance structure. Future episodes will provide more details, but for today when it comes to reinsurance structures and providers, dealers should remember to expect more and accept nothing less.  

Let’s recap: 

• 100% stock ownership
• 100% of the profit
• Full disclosure
• No writing agreements
• Minimal initial capitalization & operating costs
• IRS stamp of approval
• No personal or dealership contract guarantees
• Choice of wealth manager (& investments)
• No float
• 5-day ceding
• Ceding of all ‘written’ premiums
• Net/net remittance
• No money leaves US (CFC)
• Loans from profit AND unearned premiums
• Dividend discretion & as qualified distributions
• No hidden or extra fees
• Recognized & qualified CPA firm
• Custom rates, terms & coverages
• Ability to reinsure ALL products
• Fully insured products
• Dealer tieback for repairs
• Claims involvement & override authority
• Dealer reference list upon request
• Provider track record
• Detailed financial reporting (In-person, quarterly cessions…my jam)
• Trusted ally

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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