09 Dec Is Your Reinsurance an Afterthought?
Here’s the deal: many moons ago, all the major service contract companies decided it was time to squeeze more profit out of their relationships with auto dealers. They were already gouging the dealers for everything under the sun, so there was no point in being up-front and trying to raise prices once again. So, they went to the insurance companies that underwrite service contracts, and bargained with them until the reserves set aside for claims became Olive Oyl-skinny. The advantage? Now the business cost to the dealer had some “empty space” to stuff extra commissions for the service contract company…needless to say, not a good thing for the dealer.
This history is important to understand what’s happening today. These old-school service contract companies are now hearing (daily) from dealers who say something along the following lines: “Mr./Mrs. Agent-Representing-Service-Contract-Company-XYZ, I really like you and want to keep working with you. However, I want to reinsure my products, and if you can’t deliver this for me, then I will find a new provider.” Next steps? That agent and their old-school provider scramble (like they’re on a hot tin roof) to bolt-on reinsurance to the existing F&I program.
What does this scrambling result in? It’s not pretty. You see, since the underwriter already agreed to skinny insurance reserves, it takes tremendous volume for an underwriting profit to occur. When you scale it down to a dealer’s level, then it simply doesn’t work well. When you reinsure old-school “bolted” products, you’re agreeing to the same crappy reserves that old-school insurance companies allowed themselves to be negotiated down to. Yes, those skinny reserves meet compliance. But so also do reserves that are more reinsurance-friendly.
It’s easy to know if you’re currently involved with a “bolt-on” reinsurance program: is your reinsurance company upside down, ever? Is your loss ratio sky high? Is your reinsurance company being managed by someone whose name you don’t even recognize?
Just know it doesn’t have to be this way. In fact, if it is, you are missing an opportunity to change your legacy. This really is true of reinsurance. It’s really not just hyperbole. There really are reinsured contracts out there that were designed from the ground up to be optimized for dealer reinsurance programs.
“Bolt-on” reinsurance is about the worst idea on the planet. It’s a little like hearing the old adage about “For Pete’s sake, don’t eat the yellow snow!”…and then deciding that it’s somehow better to eat the BROWN snow.
Yuck. Don’t do it.
P.S. If you’re an agent for Bolt-On Reinsured-Contract-Provider XYZ, we really want to speak with you before you get left in the dust. Contact me confidentially at firstname.lastname@example.org.