Treating reinsurance as an additional profit center at your car dealership

The first of the year is the perfect time to build a forecast based on what's possible if we focus on the details that drive profitability. Most dealers start that process by evaluating the performance of all the different profit centers of the dealership: car sales, finance and insurance (F&I), parts, and the service department and body shop. The result? A prediction for the growth expected from each department and a clear idea of what investments could accelerate that growth.

However, this careful assessment and the resulting plans often don't trickle down to reinsurance or participation programs. The truth is that the performance of every other department directly impacts your reinsurance program. If you start viewing your reinsurance and participation programs as additional profit centers, there are several significant opportunities to improve overall performance. As we begin 2022, take the time to consider how you can optimize the way you do business.

We know that more used and new car sales result in increased premiums reinsured and more potential profit. The lift in F&I from increased volume directly contributes to the growth of a dealer's reinsurance program. But there are other ways to increase sales and reinsurance profitability. 

Train sales to advocate for F&I early in the process. Start with the trade walk. Show customers that your goal is to help them find more value in their trade vehicle. When customers feel like they're receiving the best value for their trade, you're more likely to win the sale. At the same time, you can begin to build the value of the F&I products that they'll learn about later in the process. And by advocating for F&I early in the sales process through a real-time demonstration of value, you can create increased F&I opportunities. 

For example, take a customer who comes to the dealership with a trade-in vehicle that has a simple mechanical issue. If your salesperson uses this problem as a reason to lower the amount the dealership is willing to pay, you've got a customer who already feels disappointed in the process. But if you recognize the problem and ask whether the customer has a vehicle service contract that would cover the repair, you now have a customer who feels that you're looking out for them and trying to get the best bang for their buck. And if they do have an active vehicle service contract, you now have a happy customer that just realized just how valuable a VSC could be. They're now much more likely to purchase a service contract for their next vehicle. Even if the customer did not have an active vehicle service contract to pay for the repair, they've potentially learned the value of purchasing a vehicle service contract in a way they will remember when they get to F&I.   

Offer advantage sales programs that build value. Increasing sales with a value package that differentiates your dealership from others in the market is an effective sales tool. But advantage programs also create increased opportunities for your reinsurance program profits. 

An advantage sales program may include one or more products that automatically come with purchase—products that can later be upgraded in F&I. This may include complementary key replacement, dent repair, a bundled product offering, or even a lifetime engine or powertrain program. This opportunity to upgrade, paired with the ability to reinsure the product reserves on every vehicle sale you earn because of the advantage program, makes for a solid strategy to grow reinsurance profits.
 
Create consumer confidence with used car limited warranties or third-party certifications on used vehicles. Limited warranty programs provide peace of mind for customers buying a used vehicle, but they can also be reinsurance game-changers because of their short earn-out periods. Stores with strong reconditioning standards will also generally be solid loss performers. 

For the past several years, growth in F&I has been a primary driver of dealership profitability. Increased penetration rates and PVRs in F&I have been the focus for every dealership, but every dealer still has room to grow. If you build an annual plan to increase profitability in F&I, you must take into account the effect it can have on your reinsurance position. Synchronizing your dealership's growth and profitability plans with reinsurance performance is a win/win. Here are some ways to do that:

Stop matching the term of financing with the term of F&I products sold. Finance terms on vehicle purchases have steadily increased over the past several years. Extending the loan term on a vehicle purchase happens because the customer needs to find a payment that fits their budget, not because they plan to own the vehicle longer. The tendency is to match the term of F&I products sold with the extended financing terms. But now, you're overselling coverage with terms that go beyond the customer's intended ownership period.

From a sales and F&I perspective, this adds additional payment pressure to the budget. From the reinsurance side, longer contract terms take longer to earn out and can slow future profit distributions. A more realistic and profitable approach focuses on disassociating the terms of financing with the terms of vehicle protection products sold. 

Offer higher deductibles. From homeowners or auto insurance to medical plans that require copays for doctor visits or prescriptions, we choose the amount we are willing to pay to protect ourselves. Deductibles drive a lot of that decision-making. Presenting customers with options for increased deductibles on vehicle protection products helps them manage their monthly budget. A higher deductible product will cost less per month. And for a dealer's reinsurance program, an increase in the average deductible sold typically has a positive impact on the frequency and the severity of claims charged against reinsured reserves.

It is not uncommon for dealers to increase warranty and labor rates to offset higher costs. If your overall strategy and budget are based on an increase in labor rates, it is important to consider the potential impact these changes could have on reinsurance performance. 

An increase in a dealership's labor rate increases the severity of a claim and will likely impact the loss ratio performance of the dealer's reinsurance program. But the impact is not limited to business sold and reinsured on a prospective basis--it also directly impacts active business written and reinsured in previous periods. It would be best also to consider the impact of inflationary pressure on parts pricing. While changing the amount of reserve ceded to reinsurance in the past is not possible, considering the appropriate rate and reserves necessary to withstand these pressures in the future is critical to the overall performance of the reinsurance program. 

Reinsurance cannot be viewed as just a result or byproduct of other dealership areas. Your reinsurance provider should consult with you to understand your sales and operating plans to find the best opportunity to drive growth in your reinsurance program. Your reinsurance portfolio can be a lucrative profit center if managed cohesively as part of your overall strategy. 

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.