Depending on the volume of service contracts sold per month and the due diligence prior to vehicle purchases, reinsurance might be a good option for your dealership. In addition to profit per unit, underwriting profit can be an extra source of income for successful car dealerships.

While many vehicle service contract companies offer lengthy terms that can run from 60-120 months, most dealers opt for shorter terms when selling warranties for their reinsurance company. Premium is usually fed into the reinsurance company on a quarterly basis. If you sell 24 month/24,000 contracts for example, you will earn premium much more rapidly than 96 month / 120,000 mile contracts.

Another qualifier for good reinsurance candidates are low mileage vehicles. Many dealerships decide to offer a few different warranty programs. They may choose to put any car under 75,000 miles in their reinsurance program but use a direct write service contract for anything over 75,000 miles. Loss ratios are extremely important for reinsurance programs. Unlike major administrators or insurers, you are just one small block of business. You can’t offset losses with other blocks like you can with an insurance company. Fortunately, you can still make dealer profit per vehicle when involved in reinsurance. You sit in a position where you can profit earned premium after losses. Your risk is simply not earning said premium.

In addition to inventory, volume is another consideration for whether reinsurance would work for you. We recommend a minimum of 30 VSC a month to qualify for reinsurance. This is a major deal breaker for most dealerships. Not only do you need volume, these cars should be lower mileage vehicles with reasonable terms.

Reinsurance

The reinsurance process typically starts with an analysis of your F&I department. If you seem like a good candidate, we typically draft a warehouse agreement. For the stated period of time, the premium will be “warehoused” while you decide whether or not to form a reinsurance company.

If you decide to form the reinsurance company, the insurer requires a 3 party trust agreement between the bank, the reinsurance company, and the insurer. Once the company is formed, net premium after claims is usually ceded into the company on a monthly or quarterly basis.