Dealer Reinsurance’s Unseen Profits
Dealer reinsurance provides new opportunities for higher gross margins.
Your company’s service and parts department is undoubtedly its main revenue generator, similar to the majority of American auto dealerships. According to the National Automobile Dealers Association, service and parts make about 44% of the average dealership’s gross income. But if your finance and insurance (F&I) division doesn’t come in second place in terms of earnings, it might be time to reconsider your approach and take dealer reinsurance into account.
You currently profit from GAP insurance, extended warranties, and other financings, but by dabbling in dealer reinsurance, you might be able to boost your earnings even further.
Dealer reinsurance – what is it?
You presumably work with insurance providers right now that have agreements with your clients. These clients pay the insurance company monthly premiums; if they ever need to file a claim, the carrier is in charge. This procedure is in your control when you use dealer reinsurance. Reinsurance shifts the risk from the major insurance carrier to the reinsurance provider for your dealership.
Dealer reinsurance enables dealers to split investment and underwriting profits from the F&I products they offer. Reinsurance is applied to powertrain contracts, tire and wheel protection, GAP insurance, vehicle service contracts, key replacement, and various other F&I products.
Dealer reinsurance’s disadvantages, which you may have heard about
Due to negative publicity, some dealerships have shied away from the reinsurance market. The IRS has previously pursued the reinsurance business in an effort to control, among other things, insurance laws, what can be written off, and how taxes are paid. The Foreign Account Tax Compliance Act and the release of Form 8938 in 2013 caused the IRS’s most recent problem. Their main issue was that American dealerships weren’t paying taxes on foreign assets.
It seems like the IRS has given up now that the reinsurance industry is lawfully regulated. Dealers shouldn’t encounter any issues as long as their reinsurance businesses are operated legally.
Reinsurance benefits dealers in what ways?
Due to the intense front-end competition in the auto industry, it can occasionally be difficult to sell both new and used cars at a profit. Dealer reinsurance increases your profit on the back end so that there is always money pouring in even when sales are slow.
But it’s not a quick remedy. Reinsurance must be seen as a long-term investment that pays off over time. Do you recall how poorly auto sales performed during the recession? Some auto dealers tried to buy reinsurance right away to cover losses, but it was too late. However, other dealerships that had set up their own reinsurance firms throughout time were far better protected. The auto industry is booming, and sales are once again strong. Now is the time to think about dealer insurance and the potential profit that might shield your dealership from a downturn in the economy.
Customer satisfaction is also improved by dealer reinsurance. To maximize F&I revenues, a dealer would often sell a third-party car service contract warranty; but, once that warranty is in the hands of the other company, they are in charge of it. Unfortunately, the customer will undoubtedly vent their annoyance on you and your dealership if they file a claim and the warranty provider rejects it and refuses to pay. However, if you have reinsurance and control over warranty and insurance claims, you also have control over how claims are processed and the experience your customers have in general.
Reinsurance funds might be utilized for business expansion if you wish to buy dealerships, build new locations, or make real estate investments. Reinsurance has a place in both retirement planning and estate planning.
Does dealer reinsurance make sense?
For most dealers, the benefits of reinsurance typically outweigh the drawbacks. It’s an additional revenue stream that can support a dealership’s expansion and profitability over the long term.
Do your research first if dealer reinsurance is something that interests you. Make sure everything you do is fully compliant and that it works for your dealership. Choose a supplier that provides thorough training, and think about hiring a consultant to oversee your program. Although you are an expert at selling vehicles, it is safer to seek the assistance of someone who is well-versed in the reinsurance sector. Long-term profits will be higher if you take your time and establish a solid basis for your reinsurance business.
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