Market conditions, finance and insurance pricing and customers’ auto loan terms are factors dealerships might take into account when establishing a reinsurance strategy for 2022, an executive at a leading F&I provider and administrator said.
David DeCredico, senior vice president of wealth building and strategic accounts at APCO Holdings, offered suggestions for dealerships evaluating their F&I product reinsurance position during an interview with Automotive News last month.
“Take a very critical look at what you have currently,” he advised. Reinsurance “should become part of your 2022 planning process.”
Reinsurance programs take a dealership beyond simply being a retailer of vehicle protection products to having an added stake in the underwriting results for those contracts. DeCredico called such participation extremely common and said offering reinsurance was the “price of entry” for an F&I products provider trying to win a dealership’s business.
Some dealerships might not have even considered a strategy change at all. DeCredico described a scenario in which a dealership adopts a reinsurance program and they “just kind of stay there.” A reinsurance structure chosen several years ago might not fit one’s current goals and objectives, DeCredico said.
Dealers should examine how their reinsurance setup stacks up to the plans on the market today, according to DeCredico. They should also examine their plan’s revenue stream, he said: Does money become available at the times it’s needed?
A dealership also might consider how a reinsurance plan would be affected by market forces both within and outside the store’s control.
“The cost of claims is increasing,” DeCredico said. This includes the cost of higher labor rates charged by a dealership, he said.
On top of that, a reinsured F&I product might predate the current conditions. A dealership’s labor rate increase in 2021 or 2022 could impact losses on claims filed under reinsured F&I contracts sold from 2019 to 2021, DeCredico said. A contract sold during a time of low inflation creates an obligation to pay a claim during a more inflationary period.
“You’re gonna have a higher claims cost against business that’s already been sold,” DeCredico said.
DeCredico said dealerships should talk to their administrator about F&I product pricing and future reserve.
Under reinsurance, some of an F&I product’s premium must be held in reserve to satisfy potential future claims; it typically can’t be fully disbursed to the program owner until all contracts have expired. Dealerships can’t retroactively seed reserve on older contracts, he said.
“You’re not only saying, ‘Hey, how’s [the product] performing today?’ ” DeCredico said. “How’s it gonna perform tomorrow? How’s it gonna perform two years from now, five years from now?”
It might behoove a dealership to discuss the topic internally as well.
DeCredico said he has found a labor rate increase decision might be made by a staffer such a fixed ops director who’s unfamiliar with reinsurance and might not recognize the effect upon that portion of a dealership’s business.
Or an F&I staffer sets up a customer in an 84-month loan to make the vehicle affordable. “Far too often,” the F&I office will also offer the consumer an 84-month service contract, DeCredico said.
But the customer might have come with a 4-year-old trade-in and only plans to keep their new car four years. There’s no need for a seven-year service contract. If the F&I office can disassociate the loan term from the service contract term, “what you’re doing is you’re freeing up payment,” DeCredico said. That allows the customer to potentially purchase more products.
Selling a 48-month service contract to that customer not only frees up payment, it also shortens the reinsurance term and the time until the dealership collects the underwriting revenue from the product.
DeCredico said he thought dealerships often segmented by department while profit planning, but he rarely had seen reinsurance arise in this discussion.
“I think it’s a vital part of the plan,” DeCredico said. Synchronizing dealership and reinsurance growth can “supercharge the performance of both departments,” he said.