22 Aug Admin Obligor vs Dealer Obligor
What’s the difference between Admin Obligor (AO) vehicle service contracts and Dealer Obligor (DO) vehicle service contracts? This is an important question for all reinsured dealers to ask and understand. The short answer is: it depends on what you, the dealer, wish to accomplish—and also on the states you do business in.
Here’s the long answer:
- First, you should know how these two types of vehicle service contracts (VSC) are alike. As far as the end customer—your customer–is concerned, their experience with AO vs DO is identical in the event of a claim. The claim will be handled by a professional call center, with certified staff ensuring the best possible outcome. Both AO and DO service contracts employ an A- rated (or better) insurance company for a stop loss policy that ensures the claim will be paid after 60 days, even if the dealership and reinsurance administrator are bankrupt or otherwise unable to make the customer whole. This is exactly the same outcome the customer would get with a non-reinsured (stand alone) vehicle service contract from the manufacturer or a traditional insurer.
- Admin Obligor vehicle service contracts are between the administrator and the customer. This means the administrator is on the responsibility “hook”, not the dealer. Because of this responsibility, the administrator requires that all unearned reinsurance funds be held in trust for benefit of the dealer—unless the administrator allows borrowing against unearned premium. (see next bullet point)
- Admin Obligor vehicle service contracts are not all made equal. Most do not allow the dealer to access reinsurance premium that has not yet earned out—but there are now exceptions that allow you to borrow up to the inverse of your loss ratio. For instance, if your loss ratio on your book of business is 40%, then you can borrow up to 60% of your unearned premium. (You can, of course, borrow on 100% of your earned premium—or take distributions on the earned premium at the dividend tax level.) Ask your administrator if they permit such borrowing against unearned premium…and if they don’t, know that it will severely impact your ability to make the most of reinsurance.
- Conversely, Dealer Obligor vehicle service contracts are between the dealer and the customer, which means the dealer is on the “hook” as far as responsibility goes. This means the reinsurance premium can be held in an investment account owned by the dealer’s reinsurance company, which provides for more flexibility in how funds can be invested or accessed by the dealer.
- Dealer Obligor vehicle service contracts are not any more “risky” for the dealer than Admin Obligor VSCs, as long as the reinsurance program is properly structured. (If this concept were truly “risky”, then the administrator would never sell Admin Obligor contracts!) The administrator can easily monitor your reinsurance company’s performance over time, and adjust reserves accordingly. Again, if the dealer or the reinsurance company become insolvent, there is a stop loss policy that will kick in to make the end customer whole.
- Different states have varying regulations regarding AO and DO VSCs. You’ll want to be aware of whether your state allows one or the other, or both (which is true for most states).
Now that you know the outcome for your customer is the same whether you choose AO or DO, the question becomes: what is best for you, the dealer? Whichever structure you choose, know this: through the beauty of reinsurance, you are getting ready to create an additional profit center that can generate dramatic results for you and your legacy.