Reinsurance allows the dealer to own and control their own insurance company that accepts premiums generated from vehicle service contracts and other aftermarket products. You hold the premium reserves and earn 100 percent of the underwriting profits and investment income from those premiums. This provides you with a new profit and wealth stream. The reserves are also reinsured, which limits the risk to the dealer. You can stop giving revenue away to your current vehicle service contract providers.
The vehicle service contract programs described below are representative of an “Administrator Obligor” and are insured by an A-rated insurance company.
A dealer or producer-owned reinsurance company is considered a standalone C corporation that is referred to as IRC section 831(b). This company forms a trust account for the purpose of accepting premiums and paying out claims. It is a separate entity from your dealership.
Premiums are fully insured by an A-rated insurance company. This creates what is considered an ‘arms-length’ transaction. The insurance is consistent for the duration of the term for each and every vehicle service contract. This insurance company is also called the “fronting” insurance company. If the claims exceed the reserves in the company, the fronting insurance company will be responsible for paying claims beyond said reserves. While this is an unlikely scenario, it provides a safety net for the dealer as well as the customer.
An “Administrator Obligor” dealer-owned reinsurance company is considered a small property and casualty company by the Internal Revenue Service (IRS). If annual premiums are below a $1,200,000 cap, the company will only be taxed on its investment income.
Further, the company will utilize turnkey vehicle service contract transactions. An administrative fee and an insuring fee per policy are paid to an experienced Administrator Obligor to administer all claims on a nationwide basis within the US.
A Retro Program permits a dealer to join in many of the underwriting profits and investment income without any risk. Participation is dictated by the volume of vehicle service contracts sold and the underwriting profits produced by the dealer. The dealer will typically receive a portion of the profits at the end of the year.