Even in the best of times in the auto market, dealers still face key challenges: growing operating costs, slim profit margins on new vehicles, and estate planning are all critical issues that must be prepared and planned for. If your F&I product provider offers profit sharing programs and you aren’t participating in any of them, you could be missing out on short and long-term financial benefits.

Know Your Options

When it comes to profit sharing programs, it’s important to understand the difference between various structures offered. It’s also important to ensure that your administrator or provider has a strong understanding of these programs and is giving you accurate information! The most common participation program types are Retro programs, Dealer-Owned Service Companies and Reinsurance. Choosing the best structure for your business is vital to ensure that you’re getting the most out of it and setting yourself up for profit-sharing success.

Retro Program

Retro programs have the advantage of presenting the lowest risk when it comes to profit sharing: the dealer carries none of the liability for claims, and so long as your production and loss ratio are within the ranges required, you will receive a payout; you can then use the funds at your discretion.

However, retros come with more limited earning potential: there is typically a longer wait time for payouts, your retro payments are contingent on production minimums as well as loss ratio requirements (which can also limit the share of underwriting profit you receive), and you don’t receive preferential tax treatment on your retro payments. If you’re new to the realm of participation programs or aren’t prepared to venture into reinsurance yet, a retro program can be a good way to test the waters without assuming any risk.

Dealer-Owned Service Company

A Dealer-Owned Service Company, or DOSC, allows the dealer to maximize their F&I profits by earning underwriting and investment income on product sales in addition to the existing commission income earned on these sales. The DOSC is structured as a service contract provider, which then arranges for a third-party administrator to administer the F&I products it sells; since the products belong to the DOSC, the dealer has greater access to underwriting profits compared to some other reinsurance structures.

The DOSC can also provide an additional cashflow for the dealership, since the underwriting profits belong to the DOSC and can be borrowed against for virtually any reason. The structure also offers certain tax advantages and can aid in wealth building and estate planning.

Reinsurance

Reinsurance piques a lot of dealers’ curiosity, and it’s easy to see why: a reinsurance program offers higher earning potential, advantageous tax treatment and, depending on your agreement, you also have some latitude when it comes to investing the underwriting profit held in the reinsurance company. You could also opt to take a loan or a withdrawal against the underwriting profit, although this also depends on the terms of your treaty with the insurer.

But these advantages come at a price—literally! The costs of maintaining a successful reinsurance company can range into the thousands of dollars per year, to say nothing of the initial formation expenses (which also run into the thousands). Beyond that, there is very real risk associated with a reinsurance company, since incurred claims are paid from your claim reserves that are held by your reinsurance company: you don’t want to end up upside-down!

This transfer of risk from an administrator or underwriter to the reinsurance company is the entire basis for a reinsurance program: without risk, it’s not reinsurance, and the IRS takes a dim view of entities trying to game the system. (And if your provider tells you there is no risk in a reinsurance position, RUN—don’t walk—away!)

A reinsurance position may not be the right fit for every dealer, but if you’re ready to take your business and personal wealth to a higher level of income development and are comfortable owning the risk, reinsurance may be worth exploring in greater detail. Just ensure that you’re working with a provider you can trust that understands the risks and rewards of this type of position!