Pub. 3 2013 Issue 4

16 AUTOMOBILE DEALER NEWS ILLINOIS www.illinoisdealers.com Is a Dealer Owned Warranty Company right for you? BY W. ROBERT MESSER, MANAGING PARTNER, RETINQ CONSULTING GROUP D ealers participating in the profit of F&I programs have noticed dramatic changes over the past two decades. From Retro and Dealer Obligor Programs to Non- Controlled Foreign Company (NCFC) and Controlled Foreign Company (CFC) Reinsurance Programs, dealers have con- tinued to have several choices as to which program benefits them the most. Also, as Vehicle quality continues to improve and F&I Product Penetration increases for most products, the profit- ability of these programs has increased dramatically the past several years. With loss ratios in decline and profits increasing dealers will continue to look for ways to maximize their reinsurance profits. The question many dealers are now asking: Is a Dealer Owned Warranty Company or DOWC, the right choice for them? What is a DOWC and how does it operate? Essentially in a DOWC, the dealer actually forms a separate c-corpo- ration structure, apart from the dealership itself, for the sole purpose of writing service contracts and other F&I products. The new entity, owned by the dealer, then becomes the obligor, and in a sense, the actual pro- vider. The dealer then selects a TPA to handle all claims and administration of their DOWC. The DOWC then controls all the funds, and based on underwriting approval controls the rates, coverage’s and investment choices. The TPA charges an administration fee which will include a Contractual Liability Insurance Policy or CLIP, depending on the TPA these fees can vary. Basic Set-Up of a DOWC • Dealer sets up a separate operating en- tity from the dealership that must be a C Corporation • The Admin/Obligor Creates all the Policies • The Admin/Obligor Company bears all the risk • All operating profits and investment in- come stay in the Dealers Portfolio • Dealer controls the company • Low Costs • With Underwriting approval the dealers control the rates and coverage’s, many make it better than the Factory coverage’s • Eliminates Ceding Fee’s, Premium and Excise Taxes DOWC Tax Ramifications • Treated as a Domestic Insurance Com- pany for Federal Income Tax purposes • Can be treated as a Small Insurance Company • Dividend Treatment for Distributions • Allows for Estate Planning and Gift Giv- ing Possibilities • Employment opportunities for family members • Expense sharing with the dealership, Ad- ditional advertising and training dollars through the warranty company Products that you can include in a DOWC • Vehicle Service Contracts • Pre-Owned Certified Warranties • Pre-Paid Maintenance • Tire and Wheel • Some bundled products depending on State Guidelines Which Participating program is right for your dealership? That depends on the risk, tax structure and control you want over your program. Each program from a Retro, Dealer Obligor, NCFC and CFC Reinsurance program has a fit in the Deal- ership world, but if you are a dealer looking for more control over the rates, coverage’s, claim processes and investment income of your company you may want to research if a Dealer Owned Warranty Company is right for you.  Rob Messer is the Managing Partner of RetinQ Consulting Group. RetinQ specializes in Insurance Advocacy Consulting, F&I Product and Training and Automotive Employee Recruitment. Rob can be reached at rmesser@ retinQ.com or 855-213-3766.