The mighty service plan
Service contracts are the Magnussen group's most profitable product. The group sells factory service contracts as well as its own. Around 40 percent of its new-car buyers purchase a service contract, says Hayden Stone, vice president at Magnussen Dealership Group.
Evaluating the risk for those contracts, and adequately hedging that risk with reinsurance, is the key to making the contracts money-earners, Stone says. The Magnussen group uses actuary tables to determine the price for service contracts. Then it limits its risk with reinsurance.
“If we sell a contract for $1,000, our maximum exposure is $1,000,” he says.
The Magnussen group reinsures 98 percent of the service contracts it sells. The contracts are administered by a third party.
The third party works with an investment company to manage the income. “Once the dealership processes the contract, we don't touch the money,” Stone says.
The money is held in reserve for the life of a contract. Then, Magnussen group takes whatever is left as income.
Each quarter, the group sits down with the third-party administrator and looks at claims and investment activity, making adjustments where necessary, Stone says. If one class of car has too many claims, for example, the service contract price will be raised.
Rather than pool F&I income, each product is kept in an individual silo. For example, all the prepaid maintenance contract income is in one silo. That way a problem in one line of business doesn't spill over into the other lines, Stone says.
“You have to manage your risks like any other business,” he says.
Magnussen Dealership Group has five dealerships -- two Toyota, one Lexus, one Chrysler-Jeep-Dodge, and a Hyundai dealership that opened in April. Each is a stand-alone entity, with its own insurance and reinsurance company.
Dealerships often make money by charging the customer more for a loan than the dealership pays the lending institution. Magnussen dealerships don't rely on that form of income too much, Bernard Magnussen says. Customers can find a cheaper loan at a local bank, and then his company loses the loan.
Magnussen dealerships sell the usual F&I products, such as GAP insurance, from outside suppliers. It also sells several of its own products, such as a tires-for-life policy, prepaid maintenance plans and Glass Etch, a theft-protection policy. Those also are reinsured.
Each dealership creates it own menu, though the products are similar, Stone says. A product can't be included on a menu until it is approved by the management group, which considers the financial strength of the company offering the product and the product's claims and effectiveness.
“We don't sell any snake oil,” Stone says.
If an insurance company refuses to pay a customer claim, Stone has the authority to override that decision and pay the claim “in the interest of customer satisfaction,” Stone says.
That happens about half a dozen times a month, he says. “Our mantra is: ‘If we are going to make a mistake, we make it on the side of the customer,'” he says.
Magnussen dealerships have sophisticated Web sites. Customers can get information on financing for F&I products, schedule service appointments, and order parts through the sites. The group has two people dedicated to managing the Web sites at all five dealerships. The Web sites “are a big source of customers,” Bernard Magnussen says.
Although Magnussen may not get involved in the minutiae of running the dealerships, he does appear on many of the sites -- welcoming customers. His oldest son, Bo, -- the only one of his five children in the car business -- runs Magnussen Lexus. He and his father appear on the Lexus Web site.