Which Reinsurance/Warranty Company Structure Should I Choose?

When your head stops spinning, take a deep breath and let’s discuss the types of reinsurance/warranty companies you should consider.  The number of companies that facilitate these programs continues to increase and each brings a unique relationship and added value to the mix.  It can be overwhelming. 

As dealers continue to see profit margins from new and used vehicle sales decrease, they search for other avenues to supplement profitability.  Most have participated in some sort of finance and insurance (“F&I”) program for decades.  At first, everyone hesitated with buying into the reinsurance company structure because it was complicated and sounded too good to be true.  But now that most are comfortable with the concept, the programs continue to change.  And for those still not participating in a program, you’re leaving profits on the table.  So let’s ask ourselves a few questions before we even consider these programs:

  • What are the goals of your dealership group?
  • Where do you stand with succession planning?
  • What F&I products do you offer?
  • How much volume of these F&I products do you sell?
  • What are your loss ratios on these products?
  • What are your goals with the manufacturer products and why?

These questions will help determine which program will work best for you and your objectives.  Next, let’s summarize the most commonly used programs:

  • Sales Commission – The dealer receives a fixed-dollar amount or percentage of the contract price.
  • Bonus and Cash Advance Programs – The dealer receives an advance payment.  In return he or she will sell more of a certain product based on actual contract sales results.
  • Profit-Sharing Programs – This is considered to be a retrospective commission arrangement.  The dealership receives compensation based on the underwriting profit of the contracts sold.
  • Dealer Owned Warranty Company (“DOWC”) – This is a non-licensed insurance company that offers warranty or obligor contracts.
  • Controlled Foreign Corporation (“CFC”) – A foreign reinsurance company that is majority owned by a U.S. shareholder that can partake in the underwriting profits of the F&I products sold.
  • Non-Controlled Foreign Corporation (“NCFC”) – A foreign reinsurance company that is not majority owned by a U.S. shareholder that can partake in the underwriting profits of the F&I products sold.

Each of these programs has advantages and disadvantages including ownership structure, tax planning, being risk-adverse, risk-reward, cash flows, fee structures, dealership involvement, initial capital, investment strategies, borrowings capabilities, etc.  We can help educate you with each scenario, but you know your dealership best and the ultimate decision is yours.

Remember, this choice is not a one-size-fits-all.  Be open-minded, consider your goals and think about your tax situation before you make this decision.  It’s not a matter of “if” you should choose one of these programs, but “which one” is best for you.  Let our SD Auto Dealer Advisers help talk through these programs.  Contact Steve Barber ([email protected], 412-697-5463) to get the discussion started.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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