Reinsurance Could Help

After years in the service-contract business, we've seen and heard nearly all the pros and cons concerning the product, and many in particular relative to dealer participation at the back end. Most dealers say they want the lowest price available, because they believe there will be no back-end profit. Others believe there's opportunity on the back end if the product is priced correctly and sold properly

After years in the service-contract business, we've seen and heard nearly all the pros and cons concerning the product, and many in particular relative to dealer participation at the back end.

Most dealers say they want the lowest price available, because they believe there will be no back-end profit. Others believe there's opportunity on the back end if the product is priced correctly and sold properly on the front end.

Depending on the structure and management of a dealership and its service program, either of these situations could work. By identifying the operating methodology of the dealer, the best arrangement on back end can be defined.

If the items identified below fit your operating method, reinsurance could be an opportunity to enhance your wealth. Do you:

  1. Motivate your key employees to remain involved in supporting and monitoring the day-to-day execution of your service-contract program?
  2. Ensure that all your used cars are properly reconditioned by the used-car department including a possible 15- to 30-day elimination period for the service contract program?
  3. Ensure that the service manager and his staff allow no upselling of repairs under the service contract?
  4. Reinforce with your finance & insurance department to sell the appropriate term of coverage to the consumer?
  5. Partner with and support the service contract provider to limit interference in the claims process by dealership managers?
  6. Exercise planning and patience in allowing five years (the average life of a service contract) for wealth to accumulate in a reinsurance arrangement?
  7. Consistently sell a minimum of 50 service contracts per month?

Reinsurance requires more involvement from the dealer and the dealership management team. However the long-term benefits can materially outweigh the additional time requirements.

Reinsurance, when managed correctly, can provide significant wealth on the back end without sacrificing front-end gross.

By managing the finance & insurance process and the service department process, the most value-added coverage plans are sold, and the claims handled appropriately. This consistently results in higher CSI and increases the service department's retention percentages.

If a dealership's operational structure does not support the guidelines discussed, than reinsurance may not prove profitable for you currently.

Dealers need to be selective in the provider they choose for these products, however. In order to properly protect the dealership from claim liability, they need to ensure that the product is both insured by an A-rated insurance carrier and that, where applicable, the contract is an administrator/obligor contract.

Through the dealer's management of the sales and claim process, his business can result in a loss ratio that provides a reasonable profit margin. Of course, the investment income on the reserve collected from the customer upfront also adds to the ultimate dealer wealth as well.

There are options that might be better fits for some dealers. Reinsurance is not a good fit for every dealer, but it might be profitable for others.

Russell S. Howells (800-527-1984) is chief financial officer of EFG Companies based in Irving, TX.

TAGS: Dealers Retail
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