NAAG has the widest array of reinsurable products in the industry and has unparalleled experience in helping dealerships implement a comprehensive reinsurance strategy. We help you understand the advantages and approaches to setting up offshore reinsurance programs.
Participation Programs for a Dealer are a financial arrangement where a dealership creates its own insurance company or partners with an existing reinsurer to assume part of the risk associated with service contracts, warranties, and other insurance products it sells to customers. Instead of relying entirely on third-party insurance companies, the Dealer can manage and potentially profit from the risks by acting as an intermediary.
Key Elements of Reinsurance for a Car Dealer
How It Works
- The dealership sells service contracts or vehicle protection plans to customers.
- Instead of passing all the risk to an external insurer, the Dealer retains a portion of the risk by establishing or partnering with a reinsurance company.
- The dealership pays a premium to the reinsurance company to cover potential claims, and in return, it shares in the profits if claims are lower than expected.
Benefits for the Dealership
- Profit Potential: If the number of claims is lower than anticipated, the dealership can retain a significant portion of the profits. Essentially, the dealership becomes a "risk-taker" in addition to a "risk-seller."
- Control Over Risk: Reinsurance allows the dealership to have more control over the insurance products they offer and how the risks are managed.
- Tax Advantages: Reinsurance can provide certain tax benefits, depending on the structure of the arrangement. It may allow the dealership to build reserves, which can be advantageous from a tax perspective.
- Improved Cash Flow: The dealership can receive upfront premiums and build reserves, improving its cash flow while managing its own risk pool.
Types of Dealer Participation Models
- CFC Structure: Controlled Foreign Corporation is a corporation that is incorporated outside of the dealership's home country (typically in a tax-friendly jurisdiction) but is controlled or owned by the dealership. In this case, the dealership would establish or own a CFC to reinsure the risks of its service contracts and warranties. The CFC is responsible for managing the reinsurance risks and providing coverage for the warranties and service contracts sold by the dealership.
- NCFC Structure: A Non-Controlled Foreign Corporation (NCFC) is a foreign insurance company that is not directly owned or controlled by the dealership. Instead, the dealership enters into a reinsurance agreement with the NCFC to cede part of the risk from the warranties and service contracts it sells. The NCFC, being an independent entity, is responsible for assuming the reinsurance risks, while the dealership continues to sell the contracts to customers and manage the customer relationships.
- DOWC Structure: A Dealer Owned Warranty Company (DOWC) is a business entity created by a car dealership to provide service contracts to customers. The dealership forms or owns the warranty company which acts as an insurance provider for the warranties it sells. This structure allows the dealership to retain a portion of the profits from the warranty business, manage risk more directly, and have more control over the warranty process.
- Dealer Owned (DO) Structure: A DO is a specialized business entity established by a Dealer to assume and manage the risk associated with service contracts and other insurance products sold to customers. The Dealer owns and controls the reinsurance company, which provides a way for the dealership to retain some of the underwriting profits and better manage the risks associated with the warranties and service contracts it sells.
- Retro Structure: A Retro Program is a financial arrangement offered by NAAG’s Partners that allows Dealers to earn retroactive (or back-end) rebates based on the performance/losses of service contracts or other products they sell. The primary goal of a Retro Program is to reward the Dealer for low claim activity or profitability, with the potential for significant financial returns based on the performance of the policy’s losses over time.
Regulations
- Reinsurance arrangements are subject to various insurance regulations, which vary by state and country. Dealerships must ensure compliance with these regulations when setting up or participating in a reinsurance program. Regulatory oversight is typically provided by insurance commissions.
Long-Term Financial Strategy
- Reinsurance can be part of a dealership's long-term financial strategy. It allows the business to generate additional revenue streams beyond just selling cars and financing, diversifying its income sources.
Participation Programs for Dealers are a strategy that allow our Dealers to share in the financial risk and potential rewards of the service contracts and other insurance products they sell. By retaining some of the insurance risk through a reinsurance arrangement, dealerships can increase profitability, control their risk, and gain tax advantages. However, it requires careful management and an understanding of both the risks involved and the regulatory environment which NAAG can assist with.
