The importance of benchmarking your reinsurance performance

If the last two years have taught us anything, it's that preparing for the unexpected should be part of your strategy from now on. That can mean having the tools in place to shift priorities at a moment's notice. But it should also mean taking the time to analyze your reinsurance program's strengths and weaknesses and evaluating where you are when it comes to running the most profitable business possible and meeting your goals.

Over the past couple of years, many dealers have seen a net positive impact on their reinsurance positions, thanks in large part to increased performance in F&I. There have been significant conversations about the rising tide in F&I associated with the pandemic and many discussions that dissect the reasons for these increases and how to maintain the same growth in the future through improved processes, better customer experiences, and enhanced product offerings. While F&I growth has been in the spotlight, let's not forget that increases in F&I production have translated into increased written premium ceded to dealers' reinsurance positions. Just as crucial in the conversation should be an analysis of reinsurance performance and future growth. That said, it's critical to take the time to analyze your own performance and how you measure up to what's happening outside of your lot.

This concept of benchmarking performance is a familiar one in the automotive industry. Many dealers already participate in 20 Groups to share and compare financials and metrics to learn what other dealers are doing to drive success. Benchmarking in reinsurance follows a similar thought process—working to understand how other dealerships are performing and how their strategy impacts their losses relative to what they see in their reinsurance position. At the prospect of even more analysis in a numbers-heavy industry, it's not uncommon to hear dealers ask why they should care about key performance indicators if their profit margin is healthy today. But after analysis, you'll have a better idea of what changes can be implemented to improve your ongoing loss experience, increase premiums written, enhance investment returns, and shorten the earnings cycle to allow for expedited creation of distributable surplus. Here's a look at why, how, and what to benchmark and some real-life examples of how your dealership can benefit.

Your reinsurance performance doesn't just depend on how lucky you are on any given day. The main reason to compare your results against a set of benchmarks is to determine what actionable intelligence you can collect to give yourself—and your reinsurance program—a strategic advantage. With the right kind of deep, expert analysis, your administrator can flag patterns that could make a big difference over time.

It's true that very few dealers have the same business model you do, meaning no comparison will ever be apples to apples. Differences in products reinsured, different rates of contracts on new vs. used vs. CPO wraps, different terms and deductibles—all these can impact performance. But without operating under a constant state of experimentation in your F&I department, benchmarking is the best way to get a look at how you could be performing under different circumstances.

Realistically, benchmarking reinsurance performance isn't something a dealer can do independently. Informal conversations about loss ratios won't give you the insight you need into the factors that drive those numbers. But your program administrator has access to a large amount of data for a wide range of dealers with an equally wide range of operating philosophies. They should also have the ability to group that data by geographic location, volume, franchise, and more to showcase how your peers are performing. The best benchmarks will include some of each of these elements and take place on a regular basis, ideally semi-annually. The earlier you can identify trends, the earlier you can adjust your business plan to have a positive impact.

There's no shortage of data to review, from overall results to product-specific numbers. Below are a few areas that you should focus your attention on:

• Earned premium percentage: Based on actuarial estimates and mix of business written, estimates the amount of liability associated with contract sales that have expired.
• Frequency of claim: The number of claims per contract written.
• Severity of claim: The average dollar amount of per claim.
• Loss ratio: Claims incurred divided by earned premiums. 
• Sales mix trends: Includes new vs. used mix, mile band analysis, vehicle age, and other factors.
• Retention rate: Percentage of claims returning to your dealership/dealer group for repair.
• Early Claims: Measure of claims occurring within 30-60-90 days of contract sale date.

Once you've got the numbers, you can work with your administrator to see if there is a noticeable difference in your reinsurance performance compared to other dealers—and what's driving it.

Here's an example of how this kind of deep analysis can benefit your dealership. What's the takeaway if a review of your reinsurance performance shows that your portfolio of business is 45% earned for a given policy year? Without anything to compare it to, there probably is nothing to glean from this data point; however, if you put it up against a benchmark of comparable dealers that shows that, on average, they are 52% earned for the same policy year, you can start to learn something. A 7% earned premium difference for a similar production period most likely signifies that the average term of the contracts sold at your dealership is longer than the average term of contracts sold by similar dealers. The longer it takes to earn out your reinsurance position, the longer it takes to generate available distributable surplus. When contemplated as part of an overall F&I development strategy, this valuable information can also help you generate additional F&I opportunities. The value of benchmarking provides you with actionable intelligence that not only allows you to manage the earnout of your reinsurance position but also identifies a training and development emphasis to incorporate into your F&I plan.  

With better and deeper analysis, more actionable information becomes available. In reviewing a reinsured dealer's performance recently, we discovered that when customers returned to the issuing dealer for repair under the vehicle service contract, the average claim had associated rental car reimbursement of four days. In comparing this performance against a benchmark, we were able to show the dealer that his average days per rental were roughly 1.5 days longer than comparable dealers. After digging into the issue a bit, the dealer determined that a regular practice of his Service Department was to prioritize the repairs for customers that did not have rental coverage, generally because they didn't purchase a vehicle service contract. Unknowingly, this practice cost this dealer's reinsured position about 8% more per claim. With this knowledge, the dealer was able to institute change in his Service Department that addressed his reinsurance performance and likely also fixed a CSI issue for good customers waiting longer for repairs.

The number of data points that can be benchmarked is almost countless. Having a strong reinsurance consultant to guide you on what is most important is critical to ensuring that the focus is on the right things. But benchmarking is not a one-time measure. You can't set parameters once and assume that things will stay the same. And once you put a change in place, that doesn't mean that you won't have to make other changes in the future. The market changes, the mix of new and used cars fluctuates, and economic conditions are never static. Focus on the most significant value-add opportunities and follow up regularly to ensure that your changes achieve the results you anticipate.
 

Since 1984, EasyCare has been helping some of the most successful dealerships in the nation drive results in their stores with F&I solutions, total dealership development, wealth building programs and industry recognized service. EasyCare has the only F&I products named a “MotorTrend Recommended Best Buy” for franchised dealers and has an A+ rating from the Better Business Bureau. EasyCare is part of the APCO Holdings, LLC, family of brands, which has protected over 11 million customers and paid over $3.5 billion in claims. For more information about EasyCare, please visit easycare.com. For more information about the APCO Holdings family of brands, please visit apcoholdings.com.