A Account
A term commonly used in dealer reinsurance programs for the account holding assets that support unearned premium, claims reserves and other insurance obligations.
Because this money may be needed to pay future claims, investment choices are generally more restricted.
Think of it asMoney that still has an insurance job to do.
Dealer questionHow much is in my A Account, what liabilities does it support, and what investment restrictions apply?
Important“A Account” is industry/program terminology. Not every provider uses it or defines it identically.
Acquisition Expense
Costs associated with originating and putting an F&I contract into force.
Depending on the program, these can include administration costs, commissions, taxes, carrier costs and other expenses.
Dealer questionBefore premium reaches my reinsurance company, exactly what gets deducted?
Administration Fee / Admin Fee
The amount charged for administering an F&I product.
Administration may include:
- Contract issuance
- Claims processing
- Cancellations
- Customer service
- Reporting
- Compliance support
- Recordkeeping
The admin fee is often the fee dealers focus on first.
It should not be the last.
Dealer questionWhat am I paying per contract and what exactly am I receiving for that money?
Administrator / TPA
The company administering the F&I product.
TPA stands for Third-Party Administrator.
The administrator may handle contracts, claims, cancellations, customer service, reporting and other operational functions.
The administrator and insurance carrier are not necessarily the same company.
Admitted Carrier
An insurance company licensed by a particular state’s insurance regulator to write the applicable type of insurance in that state.
Agent Commission
Compensation paid to an agent or agency involved in placing, selling or servicing the program.
Dealer questionWho is receiving commissions from my business and how much?
All-In Program Cost
One of the most important concepts in this glossary.
This is the total economic cost of operating the program, not simply the advertised admin fee.
Potential costs can include:
- Administration
- Carrier charges
- CLIP premium
- Ceding fees
- Premium taxes
- Claims expenses
- Agent/MGA compensation
- Investment expenses
- Accounting
- Actuarial expenses
- Legal fees
- Runoff expenses
- Other charges
Dealer questionWhat does this program cost me per contract and per year after every expense is included?
Asset Allocation
How investment assets are divided among different types of investments.
Examples might include:
- Cash
- Treasuries
- Bonds
- Equities
- Other permitted investments
The appropriate allocation depends on liabilities, liquidity requirements, regulatory requirements, governing documents and risk tolerance.
Actuarial Fee
Money paid to an actuary for work involving reserves, expected losses, pricing, loss development or other insurance calculations.
An actuary uses data and statistical methods to estimate future insurance obligations.
B Account
A term commonly used in some dealer reinsurance programs for an account containing eligible earned surplus that has been released from certain reserve restrictions.
Depending on the program, B Account assets may have greater investment flexibility than A Account assets.
Think of it asCapital that has completed more of its insurance job and may have more freedom to work as investment capital.
Dealer questionWhen does money move into my B Account, who controls that process, and what can I do with the money after it gets there?
ImportantA Account and B Account are not universal insurance terms. Definitions and restrictions can vary materially by provider and structure.
Book of Business
The collection of contracts associated with the program.
A dealer might have thousands of VSC, Tire & Wheel and other contracts written over many years.
Cancellation
The termination of an F&I product before its scheduled expiration.
Cancellations can cause refunds and chargebacks and can reduce both current F&I profitability and future reinsurance economics.
Cancellation Rate
The percentage of contracts that are cancelled.
A high cancellation rate deserves investigation.
Cancellation Reserve
A reserve established for expected future cancellations and related refunds where applicable.
Capital Contribution
Money contributed by the owner to capitalize the reinsurance company.
This is different from premium generated by insurance business.
Captive Insurance Company
An insurance company established primarily to insure or reinsure risks connected with its owners or related businesses.
Dealer reinsurance companies operate within the broader world of captive and alternative-risk structures.
Carrier
The licensed insurance company assuming specified insurance obligations in the program.
The carrier may issue the CLIP and may subsequently reinsure some of that risk.
Dealer questionWho is my carrier, what is its financial strength, and exactly what risk is it retaining?
Carrier Fee
Compensation received by the carrier for its role in the program.
Dealer questionHow much does the carrier receive on every contract and what does it provide in return?
Case Reserve
An estimate established for a specific known but not completely paid claim.
Cede / Cession
To transfer insurance risk from one insurance company to another.
If an insurance carrier transfers specified VSC risk to your reinsurance company, that risk has been ceded.
Ceded Premium
Premium transferred to a reinsurer along with the corresponding risk under the reinsurance agreement.
Think of it asPremium your reinsurance company receives for accepting specified insurance risk.
Ceding Company / Cedent
The insurance company transferring risk to a reinsurer.
Ceding Commission
In traditional reinsurance terminology, compensation or an allowance paid by the reinsurer to the ceding insurer, often to compensate for acquisition or administrative expenses.
This should not automatically be treated as synonymous with a ceding fee.
Ceding Fee
A term used in dealer reinsurance programs for certain costs associated with the cession of business.
However, providers do not always use this term consistently.
Dealer questionDon’t simply ask, “What’s my ceding fee?”
Ask:
What exactly does your company mean by ceding fee, how is it calculated, who receives it, and why am I paying it?
That answer matters more than the label.
CFC (Controlled Foreign Corporation)
In dealer reinsurance, this generally refers to a foreign-domiciled insurance/reinsurance company owned or controlled by U.S. shareholders and subject to applicable U.S. tax rules.
“Foreign” does not mean “tax-free.”
CFC taxation is complex and requires qualified tax advice.
Chargeback
The reversal of previously recognized F&I income following a cancellation or other event requiring repayment.
Claim
A request for payment or performance under the terms of a contract or insurance policy.
Claim Frequency
How often claims occur.
Think of it asHow often are we getting hit?
Claim Severity
How expensive claims are when they occur.
Frequency measures how often.
Severity measures how much.
A loss ratio can deteriorate because frequency rises, severity rises, or both.
Claims Adjudication
The process of reviewing a claim and determining whether it is covered and how much should be paid.
Claims Adjudication Fee
A fee charged for reviewing and processing claims.
It may be included in the administration fee or charged separately.
Dealer questionAm I paying separately every time a claim is processed?
Claims Liability
The estimated amount the company owes or expects to owe for claims.
Claims Reserve
Money reserved for claims that have occurred or are expected to occur.
CLIP (Contractual Liability Insurance Policy)
One of the most important terms for dealers to understand.
A Contractual Liability Insurance Policy, or CLIP, is an insurance policy used to insure specified obligations arising from service contracts or similar agreements.
For example, a VSC obligor promises the customer that covered repairs will be paid according to the contract.
A CLIP can provide insurance backing for those obligations.
The insurance carrier issuing the CLIP may then reinsure some of the risk to the dealer’s reinsurance company.
Why CLIP matters
The CLIP helps answer a fundamental question:
Who ultimately stands behind the promise made to the customer?
Dealers should know:
- Who issued the CLIP?
- What does it cover?
- Is it first-dollar or failure-to-perform coverage?
- What does it cost?
- What risk does the carrier retain?
- What risk is ultimately ceded to my reinsurance company?
CLIP Premium / CLIP Cost
The premium paid for the Contractual Liability Insurance Policy.
Depending on the program, this can include compensation to the carrier and amounts associated with the insurance risk.
Do not automatically call the entire CLIP premium a “fee.”
Part of the amount may compensate for actual risk transfer.
Dealer questionWhat is my CLIP costing me, how much is retained by the carrier, and how much ultimately supports or is ceded with the risk?
First-Dollar CLIP / Full-Reimbursement CLIP
A CLIP under which the insurer covers qualifying contractual obligations from the first dollar according to the policy terms.
In simplified language:
The carrier is actually insuring the underlying claims, not merely waiting for the obligor to fail.
This is materially different from a failure-to-perform CLIP.
Failure-to-Perform CLIP (FTP / F2P)
A CLIP designed primarily to respond when the obligor cannot fulfill its contractual obligations, such as following insolvency or another defined failure to perform.
Under this arrangement, the obligor may normally be responsible for paying claims while it remains capable of performing.
Think of it asA backstop rather than necessarily first-dollar claim reimbursement.
State requirements vary, so FTP coverage is not interchangeable with first-dollar coverage in every jurisdiction.
Excess CLIP
A CLIP designed to respond after losses exceed a specified threshold, deductible or retained amount.
It allows one party to retain a layer of expected risk while transferring larger or excess losses.
Cut-Through Provision
A provision that may allow the contract holder to make a claim directly against the insurer when specified conditions are met, such as the obligor’s failure to perform.
This is particularly relevant to CLIP-backed service contracts.
Collateral
Assets pledged, restricted or otherwise used to secure an obligation.
Collateral may become important in reinsurance arrangements and lending against reinsurance assets.
Combined Ratio
A traditional insurance measure combining losses and underwriting expenses relative to premium.
In simplified terms:
Loss Ratio + Expense Ratio = Combined Ratio
Below 100% generally indicates an underwriting profit before investment income.
Above 100% generally indicates an underwriting loss before investment income.
Commutation
An agreement to settle specified outstanding reinsurance obligations early instead of allowing them to run off naturally.
Contract Vintage
Contracts grouped according to when they were written.
Example:
2025 VSC Vintage
Analyzing by vintage helps prevent a dealer from comparing a young book with a mature book as though they should have identical loss ratios.
Custodial Account
An account in which a financial institution holds investment assets for the reinsurance company.
Custodial Fee
The cost charged for custody and safekeeping of those assets.
Dealer-Obligor
A structure in which the dealership or a dealer-controlled entity is the legal obligor responsible for specified contractual promises.
Distribution
Money or assets paid from a company to its owner or shareholders when legally and contractually permitted.
The fact that money exists in an investment account does not automatically mean it can be distributed.
Dividend
A distribution to shareholders, subject to applicable corporate, insurance, contractual and tax rules.
Domicile
The jurisdiction where an insurance/reinsurance company is legally organized and regulated.
DOWC (Dealer-Owned Warranty Company)
A dealer-owned entity that generally becomes the obligor on eligible service contracts.
This differs fundamentally from simply reinsuring another company’s obligations.
A DOWC can potentially provide greater control over economics.
Greater control also creates greater responsibility.
DOWC-Re
A structure combining dealer-obligor/DOWC concepts with reinsurance.
There is no substitute for seeing the actual structure diagram.
Dealer questionShow me every entity involved, which entity is the obligor, which entity issues the insurance, where the risk goes and where every dollar goes.
Earned Premium
Premium associated with coverage that has already been provided.
A five-year VSC generally does not become fully earned the day it is sold.
As the risk period passes, premium earns according to the applicable methodology.
ImportantEarned premium is not automatically the same thing as distributable cash.
Earned Surplus
Capital remaining after applicable liabilities, reserves and other obligations have been recognized.
Depending on the structure, this capital may have greater investment or distribution flexibility.
Expense Ratio
Underwriting expenses expressed relative to premium.
Exposure
The amount of insurance risk being assumed.
F&I PVR
Finance and Insurance income Per Vehicle Retailed.
Useful, but it should never be the only measurement of F&I performance.
Formation Fee
A fee associated with creating and establishing the reinsurance entity or structure.
Fronting Carrier
A licensed insurer that issues or supports insurance coverage and transfers some of the risk to another insurance/reinsurance entity.
Fronting Fee
Compensation received by the fronting carrier for performing that function.
GAP
Guaranteed Asset Protection.
GAP addresses specified differences between the amount owed on a vehicle and amounts otherwise covered following a qualifying total loss, subject to the terms of the agreement and applicable law.
Its regulatory treatment and eligibility for participation vary.
General Agent / MGA
An intermediary that may be involved in distribution, program management, carrier relationships and other functions.
MGA stands for Managing General Agent.
General Agent / MGA Compensation
The money received by the general agent or MGA.
It can include:
- Commission
- Per-contract compensation
- Overrides
- Management compensation
- Other arrangements
Dealer questionHow much does my agent make from my business?
Gross Investment Return
Investment performance before investment-related fees and expenses.
Gross Written Premium
Total premium written before applicable deductions or reinsurance transactions.
IBNR (Incurred But Not Reported)
Claims that are estimated to have already occurred economically but have not yet been reported or fully recognized.
Think of it asClaims that may already exist even though the invoice hasn’t arrived.
This is one reason paid claims alone do not tell you how profitable the company is.
Incurred Losses
A broader measure of claim costs that generally includes paid claims plus appropriate reserves for unpaid claims.
In-Force Contracts
Contracts that remain active and have not expired or been cancelled.
Investment Income
Income generated by investing company assets.
It can become the second major economic engine of reinsurance after underwriting results.
Investment Management Fee
The amount charged to manage invested assets.
Investment Policy Statement (IPS)
The document establishing the objectives and rules governing the investment portfolio.
It may address:
- Risk
- Asset allocation
- Liquidity
- Permitted investments
- Concentration
- Benchmarks
- Duration
A serious reinsurance company should have an investment strategy, not simply a brokerage account.
Letter of Credit (LOC)
A financial instrument issued by a bank that may be used to satisfy specified collateral requirements.
Liquidity
The ability to turn assets into cash when needed without unacceptable losses.
Insurance companies need liquidity because claims do not wait for good market conditions.
Loan
Depending on the structure, applicable laws and governing agreements, a reinsurance company may be able to make a properly structured loan.
A legitimate loan may require:
- Promissory note
- Appropriate interest
- Repayment terms
- Collateral
- Corporate authorization
- Compliance with insurance requirements
- Compliance with tax rules
A loan is not the same thing as taking a distribution.
Loss Adjustment Expense (LAE)
Expenses associated with investigating, processing, adjusting and settling claims.
This matters because the dealer needs to know whether these costs are:
- Included in claims
- Included in the admin fee
- Charged separately
- Or allocated another way
Loss Development
The way estimated claims change as a book matures.
A five-year VSC book can look fantastic after six months.
That does not tell you what the ultimate loss ratio will be.
Loss Ratio
One of the most important reinsurance measurements.
In simplified form:
Incurred Losses ÷ Earned Premium = Loss Ratio
Example:
$600,000 incurred losses ÷ $1,000,000 earned premium = 60% loss ratio.
There is no universal “good” loss ratio.
Product, pricing, maturity, coverage, vehicle mix and claims development all matter.
Loss Reserve
An amount established for expected claim obligations.
Management Fee
A fee for managing or overseeing the entity or program.
Dealer questionWhat exactly is being managed and what am I paying for it?
Mature Book
A book of contracts old enough that much of the ultimate claims experience has developed.
NCFC (Non-Controlled Foreign Corporation)
A foreign insurance structure in which the individual dealer generally does not control the overall insurance company.
The dealer may participate economically through ownership interests or another arrangement.
Governance, liquidity, investments, taxation and exit rights need to be understood before comparing an NCFC with other structures.
Net Asset Value (NAV)
Assets minus liabilities.
Useful, but not necessarily equal to the full economic value of the reinsurance business.
Net Investment Return
Investment performance after applicable investment fees and expenses.
This is more meaningful than being shown only the gross return.
Obligor
The entity legally responsible for fulfilling the promise made under the service contract.
This is one of the first things every dealer should know about a program.
Who is actually obligated to pay the customer’s covered claim?
Override
Additional compensation paid to an agent, MGA or another party, often based on production or another agreed metric.
Paid Losses
Claims that have actually been paid.
Do not confuse paid losses with ultimate losses.
More claims may still be coming.
Per-Contract Fee
A fixed amount charged for every contract.
A $50 difference sounds small.
Across 5,000 contracts:
$250,000 per year.
Across ten years:
$2.5 million before considering the investment opportunity cost.
Premium
Money associated with assuming insurance risk.
Premium is not profit.
Premium Tax
A tax imposed under applicable law on insurance premium.
The rate and treatment depend on jurisdiction, product and structure.
Dealer questionWhat premium tax am I paying, how is it calculated, who remits it, and where can I see it?
Prepaid Maintenance (PPM)
A program under which specified maintenance services are paid for in advance.
Dealer-owned PPM can potentially create F&I economics while also encouraging customers to return to the dealership.
Producer-Owned Reinsurance Company (PORC)
A reinsurance company owned by the producer or distributor generating the underlying business.
Product Penetration
The percentage of eligible vehicle transactions containing a particular F&I product.
Products Per Deal
The average number of F&I products sold per retail transaction.
For a dealer participating in reinsurance, this is not simply an F&I KPI.
It can also affect the amount of business feeding the reinsurance company.
Profit Participation
An arrangement allowing a dealer to participate in favorable product economics without necessarily owning a traditional standalone reinsurance company.
Reinsurance
Insurance for insurance companies.
An insurer transfers specified risk to a reinsurer in exchange for premium.
Dealer reinsurance allows the dealer’s insurance/reinsurance structure to participate in specified risk and economics generated by eligible F&I products.
Reinsurance Agreement / Treaty
The contract defining the relationship between the ceding insurer and reinsurer.
It determines which risks are transferred and under what conditions.
The marketing presentation tells you what you’re being sold.
The agreement tells you what you actually own.
Reinsurer / Assuming Company
The insurance company accepting risk from the ceding company.
Required Capital
Capital that must remain available to satisfy applicable regulatory, contractual, solvency or other requirements.
Required capital is not freely distributable cash.
Reserves
Amounts established to support expected future insurance obligations.
Think of reserves as money with a future job attached to it.
Retrospective Commission / Retro
A participation arrangement where dealer compensation may depend on the performance of the underlying business.
A retro can provide meaningful economics, but it is not necessarily equivalent to owning a reinsurance company.
Risk Premium
Premium associated with assuming insurance risk.
Risk Transfer
The genuine transfer of insurance risk from one entity to another.
Moving money between companies does not by itself create legitimate insurance or reinsurance.
Runoff / Run-Off
The process of allowing an existing book of contracts to mature after new production stops.
Premium continues earning.
Claims continue.
Reserves remain.
Investments remain.
A runoff can last years.
Runoff Fee
A fee charged for continuing to administer the existing book after new business stops.
This becomes particularly important when changing providers or selling the dealership.
Dealer questionIf I leave you tomorrow, what will I continue paying until every existing contract has expired?
Runoff Reserve
Reserves maintained for obligations remaining during runoff.
Section 831(a)
A section of the Internal Revenue Code relevant to the taxation of insurance companies.
Its application depends on the company’s circumstances and should be evaluated with qualified tax advisers.
Section 831(b)
A provision of the Internal Revenue Code under which certain qualifying small insurance companies can elect specified tax treatment, subject to applicable requirements and limitations.
It should not be viewed as:
“Set up a reinsurance company and avoid taxes.”
A legitimate insurance business must exist, and current eligibility and tax consequences require professional analysis.
Service Contract Reimbursement Insurance Policy
Another term used for insurance that backs obligations under service contracts.
Depending on the arrangement and jurisdiction, you may see terminology such as reimbursement insurance policy or CLIP.
Do not assume every policy operates identically.
Read the actual coverage.
Service Retention
The percentage of customers continuing to use the dealership for maintenance and repairs.
Statutory Surplus
The excess of qualifying/admitted assets over liabilities under applicable statutory insurance accounting principles.
Surplus
Broadly, the amount by which assets exceed applicable liabilities.
But dealers need to distinguish:
- Accounting surplus
- Statutory surplus
- Available surplus
- Distributable surplus
Those may not be identical.
Sweep
The movement of eligible funds between accounts according to the program’s rules.
For example, some programs may periodically move eligible earned surplus from an A Account into a B Account.
Dealer questionWhat triggers my sweep, how often does it occur, and who controls it?
Termination Fee
A charge associated with terminating the program or provider relationship.
Understand it before you sign, not when you decide to leave.
Transfer Fee
A charge associated with transferring assets, administration, ownership or other aspects of the program.
Trust Account
An account holding assets under a trust arrangement to support specified obligations.
Assets may be subject to investment and withdrawal restrictions.
Trustee / Trust Fee
Compensation for establishing or maintaining the trust arrangement.
Ultimate Losses
The total claims ultimately expected from a book after the claims have fully developed.
Unearned Premium
Premium associated with coverage that has not yet been provided.
Think of it asMoney received for insurance risk that still exists in the future.
It should not be confused with available profit.
Unearned Premium Reserve (UPR)
The liability established for the portion of premium associated with future coverage.
Underwriting Loss
When applicable claims and underwriting expenses exceed earned premium.
Underwriting Profit
When earned premium exceeds applicable claims and underwriting expenses.
In simplified form:
Earned Premium − Claims − Underwriting Expenses = Underwriting Profit
Investment income is separate.
Vehicle Service Contract (VSC)
A contract providing specified coverage for certain vehicle repairs or mechanical failures according to its terms.
Often casually called an “extended warranty,” although a VSC is not necessarily the same thing as a manufacturer’s warranty.
VSCs are frequently a major source of dealer reinsurance premium.
Written Premium
Premium associated with contracts written during a specified period.
Written premium and earned premium are not the same thing.
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