What Reinsurance/ Warranty Company Structure Should I Choose?
What Reinsurance/ Warranty Company Structure Should I Choose?
As you look at your own dealerships profitability, health and growth this year, you have likely noticed that one topic has become of particular interest–F&I and Reinsurance.
There is a ton of venture capital interest because of the profit opportunities, so it may be time to take a closer look at your own structure and if it is yielding all the benefits you desire. There may be concerns around risks or a lack of familiarity with all the potential benefits of the different structures.
What is Dealer Reinsurance?
Dealer Reinsurance is a mechanism that transfers the risk from an insurance company to a Reinsurance company. It allows dealers to share in the underwriting profit and investment income on the Financial and Insurance products they sell.
The biggest misconception about Reinsurance is that it costs a lot of money or that your dealership must be big to get started. Neither is true.There are customized solutions for every size dealership depending on your specific growth trajectory and goals.
Profit Maximization & Cash Flow.
Why let third-party warranty companies and insurance companies profit from premium reserves that are left unused after claims are paid out. If you become a reinsurance company, you get to share in that benefit making it a profit center that becomes an additional source of income and expands your margins.
It Helps in Improving Customer Satisfaction.
As the owner of the Dealer-owned Reinsurance company, you’re in control of the warranty and insurance claims. You’re also in control of the overall experience for your esteemed customers. If you manage to keep your customers happy, your business will maintain loyal customers and discover expansion opportunities.
The Pros & Cons of Each of the Different Forms of Participation:
Bonus Programs
Pros
- Minimal involvement
- No risk of adverse effects from underwriting
- Additional compensation based on sales volume
- No participation cost
- Immediate cash flow
Cons
- Bonuses immediately taxable
- No share of earnings
- Limited control over products and program
Retro Programs (Profit-Sharing)
Pros
- Minimal involvement
- Sharing of underwriting profits and investment income
- Exposure to adverse underwriting effects is limited to the retro profit
- No participation cost
Cons
- Limited profit potential
- Future retro profits may be “at risk” due to prior losses
- Payments immediately taxable
- Retro may end upon conclusion of program
- Limited control over products and program
Reinsurance (Controlled Foreign Corporation)
Pros
- Full participation in underwriting profit
- Risk limited to initial capital and undistributed retained earnings
- Dealer retains control of program (products, investments, exit strategy, etc.)
- Reasonable formation fee and ongoing operational costs
- No federal excise tax
- Dividends currently qualify for preferred tax rates
- Allows for tax-free premium income through 831(b) election
Cons
- Earnings subject to additional layer of taxation
- Requires increased dealer involvement
- 831(b) threshold can be reached quickly in a small dealer group
- If 831(b) threshold is reached, standard P&C company taxation may be excessive (UEP 20% haircut)
Reinsurance (Non-Controlled Foreign Corporation)
Pros
- Full share of underwriting profits
- Risk limited to initial capital, subscription fees, and undistributed earnings
- Reasonable initial capital requirement
- Reasonable ongoing operational fees
- No federal income tax on NCFC
- Minimal dealer involvement
Cons
- Dealer has little to no influence
- Distributions must be authorized by Board
- Underwriting and investment income may be commingled with non-affiliated business
- Premium subject to federal excise tax
- May require purchase of stop-loss policy
- No negotiation of fees
- No ability to move to another program within NCFC
- Requires additional IRS disclosures
- May be subject to PFIC taxation
Dealer Owned Warranty Company
Pros
- Full share of underwriting profit
- Risk limited to initial capital and undistributed earnings
- Reasonable initial capital requirement
- Reasonable ongoing operational fees
- On-shore program does not receive additional IRS and Congressional scrutiny of an off-shore captive arrangement
- Potential significant access to unearned premiums that can be reinvested in the growth of the organization
- Dealer has ultimate control over the program, including but not limited to product design, pricing, investment management, and branding
- Serves as a tax-efficient vehicle, providing significant tax savings as the business grows, and it typically does not pay taxes until the book of business starts to mature
- May provide unique tax planning opportunities
Cons
- Company must pay state income tax
- May not be able to include all F &I products (insurance products, i.e. GAP)
- Earnings subject to additional layer of tax
- Requires additional dealer involvement
Any tax discussions are for information purposes only and should not be construed as actual tax advice. All programs include the dealer commission or mark-up that the dealership receives upon the sale of a contract.
Contact Us Today!
NationsGuard handles setup and all daily operations of the program. Full-service turn-key Dealer Owned Warranty Company operation (no full-time dealer staff needed).