Dealerships: Adapting Reinsurance Programs for Today’s Economic Environment

A reinsurance program allows the dealer to retain product premiums after claims and earn investment income from reserve funds over the life of the insurance contract. In many cases, we have seen this to be very profitable. In addition, it allows dealers to defer a portion of the income for tax purposes until the funds are earned and distributed.  However, the ever-changing economic environment requires monitoring these reinsurance programs.  The reimbursement for claims (reductions) and premium costs (increases) must be continuously monitored to keep existing reserves at suitable levels.

Inadequate reserves to cover claims leave dealers exposed to risk and potential future losses.  While the real work may occur in the shop, the underwriting details may be the key to maintaining reinsurance reserves.  Dealers need to ensure that reinsurance administrators provide adequate decision-making data to monitor loss-ratio coverage, as well as the funding costs of contracts and applicable fees. Multiple years of an inflationary environment have hit many areas of dealership operations, but rising costs have had a particularly significant impact on the cost of parts and labor in the service lanes and directly impact claims of the reinsurance program.

Due to an ongoing labor shortage, technician compensation has increased, directly increasing the amount of claims drawing down on insurance reserves. In most programs, dealers can set the labor reimbursement rate.  We have seen this range from the customer pay rate - a rate similar to the current manufacturer warranty reimbursement rate - to a discounted rate lower than both. 

Parts prices have increased exponentially as new, expensive technology drives up costs.  This technology, in almost all new models, whether it be infotainment systems or Hybrid EV batteries, has significantly increased the cost of repairs for these systems. Unpredictable tariffs add an additional layer of uncertainty to the amount needed in reserve to pay future claims.  Policy pricing may need to be adjusted to reflect which parts are covered to maintain previous profitability levels. Specific products may need to be excluded from coverage or prices of maintaining such coverage on these expensive parts need to be reflected in the cost of the policy sold in the F&I department.

Dealers must balance the amount taken from the reinsurance funds for claims against the service department's bill for the work.  This works best when most of the work is retained by the dealership's service department. However, not all reinsurance claims are serviced at the dealer’s service lanes from which the policy was purchased; some may be done by other dealerships or even independent service shops.  Dealers should monitor the mix of claims serviced at their dealerships versus their competitors.  Reimbursement should be set to be most advantageous for each dealer’s unique situation.

With labor and parts claim costs rising, it is more critical to make sure your policies are priced correctly so the amount going into the reserve account is appropriate.  The price of a policy must keep pace with these rising costs to ensure the reserve remains adequate to pay claims. 

Our most successful dealers evaluate both reimbursement and contract cost quarterly or biannually. This allows for adjustments in smaller increments to limit the disruption to the service department and F&I sales process.  Making proactive changes to assess risk exposure can have lasting positive effects on limiting exposure and the longevity of reinsurance programs.

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