How Does Dealer Reinsurance Work?
The basic concept behind dealer reinsurance is simpler than the terminology surrounding it.
The basic concept behind dealer reinsurance is simpler than the terminology surrounding it.
Step by Step
The Dealership Sells an Eligible F&I Product
The customer purchases a product such as a Vehicle Service Contract, Tire & Wheel protection or another eligible protection product.
Premium Supports the Insurance Risk
Depending on the program and structure, eligible premium associated with the risk is ultimately ceded to or otherwise participates in a dealer reinsurance structure.
That premium is not automatically profit. It exists in part to pay future claims.
Reserves Are Established
A five-year VSC could produce claims years after the contract was sold. Appropriate reserves must therefore be maintained against future obligations.
Claims Are Paid
Valid claims are paid according to the contract. Claims performance becomes a major determinant of the ultimate economics. Dealers should monitor:
- Claim frequency.
- Claim severity.
- Paid and incurred claims.
- Loss ratios.
- Product performance.
- Contract vintage.
Assets May Be Invested
While reserves are held against future obligations, permitted assets may be invested according to the structure and applicable requirements. That creates the second potential source of economics: investment income.
Results Develop Over Time
In simplified terms:
If $1 million of earned premium ultimately produces $650,000 of claims and applicable expenses, approximately $350,000 of favorable underwriting economics remains before other applicable costs and taxes.
Value Can Accumulate
Repeat that process across thousands of contracts, multiple products and many years. That is where the long-term power of reinsurance can emerge.
The Bottom Line
Dealer reinsurance turns F&I from purely today's transactional gross into a potential long-term underwriting and investment business.
When was the last time someone independently reviewed your reinsurance program?
Confidential. No obligation. There is no charge for the initial assessment. You may discover an opportunity, a problem, or that your program is exactly where it should be. But you’ll know.