The Basics of Reinsurance

Let’s talk about Reinsurance. I get asked a lot of questions about reinsurance. What is it? Should I be reinsured? Does it make financial sense? Is it a scam? What if my account goes negative? I’m here today to answer all these questions.

First, what is it? The definition of reinsurance: A process whereby one entity (the reinsurer) takes on all or part of the risk covered under a policy issued by an insurance company in consideration of a premium payment. In other words, it is a form of an insurance cover for insurance companies.

Let’s break this down from a dealership perspective. You sell a service contract to a customer. You are given a cost. For example, let’s say that cost is $1,000. The retail price of that contract is $2,000. You sell the contract for $2,000. You keep $1,000 of profit to the store and send a check to the warranty company for $1,000. If this is how you do business now, that is considered core business or a direct write. Different companies call it different names.

If you have reinsurance set up, everything stays the same. You still keep the $1,000 profit for the store, and you still remit the contract and send out $1,000 (cost). The difference is that $1,000 cost will be directed to a company that you own, minus any admin fees. These admin fees vary by agent. A good example would be a $200 admin fee. After your fee, $800 will go to your reinsurance account. If you sell 10 contracts a month, you will have put in $8,000 into your reinsurance company. You see where this is going.

Well, what happens when there is a claim? Claims are paid directly out of your unearned premium account. The national claims rate is right around 50%. For basic math, you would retain $4,000 a month in your reinsurance company. The important part to focus on is that this is money you were sending away to someone else. Now you get to retain some of it. This money can also be invested.

Should you be reinsured? Does it make financial sense? The answer is, maybe. Reinsurance goals are different for every store. You really should be doing at least 10 contracts a month for it to make sense. However, there are dealerships that only sell 5 a month and add a 3/3 limited warranty to all vehicles sold. These stores can put enough money into their reinsurance company for it to make sense.

Is it a scam? The very easy and short answer, NO. Dealerships all over the country are reinsured. We have attorneys and CPA’s on staff to make sure we are up to date with current tax laws and regulations. You own 100% of your reinsurance company. We just manage it for you (this is why we charge an admin fee).

What if my account goes negative? Your reinsurance company is backed by insurance. If you were to go “negative”, you would go down to $0 and the insurance company would fill in that gap. We are also sensitive with this. We make sure to set you up for success. There are different strategies used to make sure our dealer partner’s reinsurance companies are profitable.

This is a very short article to something that can be more complex. We consult all of our dealer partners on when to draw money, how much to draw, what tax advantages we have, and how to keep your reinsurance company thriving. Make sure you have the right partners when doing reinsurance.

At The Dealer Coach, we are always here to help, even if you are not a current client. Have questions? Contact us directly.