PROFIT SHARING PROGRAMS

SELF INSURANCE

This is the type of program where the dealer would retain all the liability on the service contract policy and would consequently be immediately entitled to all the revenues.  The automobile dealer is responsible for all claims payments.

 

ADVANTAGES

 

Most underwriting profits – This type of profit participation program normally yields the most underwriting profit potential because of the lowest fees.

 

Most control of assets – This type of program will also normally allow the greatest control of the assets generated from the sale of the service contract.

 

DISADVANTAGES

 

Highest immediate tax - Because all the premiums are received and taken into income immediately at the dealership level, the corresponding taxes on those funds are also paid immediately (at the dealership tax rate).

 

Lowest Net Reserves – And because the taxes are paid immediately, there are much less funds available for the payment of claims.  Another consequence of the immediate payment of taxes is that there is now the least amount of assets on which to earn investment income for the payment of future claims.  In other words, this type of program has the smallest margin of protection against ultimate losses.

 

Greatest amount of liability – Since by definition the business is “self-insured”, the dealer consequently retains all of the risk, with no insurance company to pick up any claims in excess of premiums (other than through a “bankruptcy” policy for the protection of customers).

 

No required establishment of reserves – This is the most subtle and potentially onerous consequence of a self-insured program.  The dealer needs to keep sight of the fact that the service contract liability occurs at the end of the contract (on new cars) and needs to set aside adequate reserves to fund future claims.  If the dealer has access to the funds immediately (and also has to pay taxes), then there is the natural inclination NOT to set up reserves on those premiums, especially since the reserve cannot be deducted on a tax basis.

 

Lowest total income in proportion to liability – We stated that this was the program with the “most” underwriting income, but because of the immediate taxation combined with the inability to establish reserves, this type of program ends up yielding less total income than many “fully-insured” programs with much more proportionate liability.

 

 

CENTURY AUTOMOTIVE SERVICE CORPORATION

10555 Montgomery Boulevard NE, Building 2

Albuquerque, New Mexico USA 87111

Toll Free: 888.338.0389

Fax:  505.872.2122

info@centuryservicecorp.com

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