Auto dealers participate in reinsurance programs to generate additional profit streams beyond their primary sales and service operations. When customers purchase extended service contracts or other aftermarket products, the premiums paid by customers are pooled together in a reinsurance account. Over time, as claims are paid out, and the extended service and warranty contracts mature, any remaining funds in the reinsurance account, over the reserve requirements can be distributed to the dealer as profit. This can significantly increase the overall profitability of the dealership.
Reinsurance programs can provide tax advantages to auto dealers. The premiums collected from customers are often considered tax-deferred income, as they are not taxed until claims are paid out or profits are distributed. This can allow dealers to defer taxes on their reinsurance income, potentially reducing their current tax liability and providing a more favorable cash flow.
Reinsurance programs typically involve investing the pooled premiums in various investment vehicles to generate returns. Dealers can benefit from the investment opportunities within the reinsurance program, especially in the unrestricted “B” account. Unlike the restricted “A” account, the “B” account allows dealers to invest in a wider range of asset classes, including equities and higher-yielding investments, which can potentially provide higher returns over time.
For example, in a typical reinsurance program, the “A” account is subject to certain restrictions, such as a maximum allocation of 10% to equities, with the remaining 90% invested in fixed income. Once funds are moved to the “B” account those restrictions no longer apply.
One key aspect that dealers should consider when selecting a trustee is the availability of an open-architecture model for “B” account investing. That gives the dealer access to a wide range of investment options beyond those offered by the trustee’s own organization. This flexibility allows dealers to tailor their investment strategy based on their specific financial goals and risk tolerance, potentially leading to better investment performance.
Investing “B” account funds
Keeping “B” account held in the reinsurance company’s name—typically still held by the trustee—can benefit the dealer by deferring taxable earnings. The “B” account provides dealers with the flexibility to invest in various asset classes, including equities and other higher-yielding investments. However, not all trustees offer total flexibility in terms of investment options. This is where an open-architecture model can provide significant benefits to auto dealers.
With an open-architecture model, the trustee does not limit dealers to a predefined list of investments or products offered solely by their organization. Instead, dealers have the freedom to select investments from a broad universe of options, including those outside of the trustee’s organization. The benefits of a thoughtful investment program can be substantial, with the potential for “B” account funds to compound over time on a tax-deferred basis.
Too often funds just sit in cash
Setting up a reinsurance program can be intensive for dealer representatives, involving attorneys, CPAs, and other professionals. Once the program is in place, dealers can benefit most by staying proactive in managing their funds, given the demands of running their businesses.
The result may be that even when funds are earned, dealers leave the money in the “A” account … or simply sitting in cash in the “B” account. A better alternative may be to automatically move funds from “A” to “B” and implementing an automatic investment program.
This is where agents and trustees can play a pivotal role as trusted advisors. Agents can work closely with trustees to bridge the gap between the reinsurance company and the dealers, helping dealers fully understand the benefits of their program and how to make the most of it. Trustees, in turn, can provide valuable support as dealers seek to maximize long-term value of “B” account funds.
UMB is a nationally recognized and ranked provider of bond trustee and agency services to the corporate and municipal marketplaces. Visit umb.com to learn how we can support your organization’s trust and escrow needs, or contact us to be connected with a corporate trust team member.