Reinsurance: The Beginning Basics

Reinsurance: breaking down the first steps

In last month’s newsletter we touched on the broad strokes of Reinsurance and why it an absolutely vital part of a profit savvy car dealer’s business model.  This month, we want to take a step further and break down a few of the options. (Click here to read last month’s REINSURANCE article

Reinsurance programs allow dealers to share in the service contract, warranty, and other F&I products underwriting profits and obtain investment income earned in a Reinsurance Company with substantial tax advantaged benefits.  You are a good candidate for a Reinsurance Company if you meet the following criteria:

Wanting to own the underwriting income of your F&I products

Understand the risk associated with a reinsurance program

Will actively participate in reinsurance loss control measures suggested

Is looking to defer and reduce tax obligations

Is interested in long term profit opportunities

Produce a minimum of 25 Vehicle Service Contracts or 50 GAP contracts per month

There are two types of Reinsurance Company options that are available, each has different characteristics.  The first option is the Controlled Foreign Corporation (CFC) or 953d company:

You determine the Reinsurance Company shareholders. 100% of the company’s stock is owned by the dealer (must be 10 or less)

Turks and Caicos domicile, offers reduced regulation and regulatory infrastructure

US Tax Payer - follows IRS Code – 953d, with Insurance company taxation –

831B election as a “small P&C insurance company” - Pays Tax on investment income only at a reduced tax rate, see Table *A*

Trust Account holds funds in the US

Your company accepts underwriting risk and performance for the book of business your dealership(s) write

You can cede a maximum of 1.2 million per year in premium (approx. 250 VSCS written per month) and receive 100% of the underwriting profits and 100% of the investment income on reserves that are held to pay claims

Profits can be taken as earned monthly, then taxed as Qualified dividends paying only a tax of up to 20% Maximum on the amount released

Monthly reporting allows you to evaluate the company’s risk strategies, surplus, timing of distributions and personal wealth-building objectives

The second option is Non-Controlled Foreign Corporation (NCFC):

This structure is typically used by dealers that wish to reinsure a large volume of Vehicle Service Contract business over 1.2 million per year (250 VSCs per month)

Dealer Participants own shares in the corporation , as one shareholder within a group of shareholders

Owns shares in a Foreign Company - typically not voting shares

Owners of shares exceeds 10, as compared to outright ownership as with a CFC

VSC underwriting profits tracked according to dealer production / stock ownership                                                        

Foreign insurance company – not an IRS recognized US tax paying corporation therefore requires listing as foreign company ownership.

Bermuda domicile and other foreign domiciles used

Funds are held via a Letter of Credit, which comes with a Letter of Credit fee shared by shareholders

Dividend disbursements and share redemptions controlled by board of directors

Dividends to shareholders taxed at prevailing dividend rates

Redemption of shares taxed at prevailing capital gain rates

We understand setting up a reinsurance program can be a complex task, but we will handle it for you from start to finish. The team at Automotive Assurance Group are industry experts on Reinsurance Companies, their formation and helping dealers determine what the best fit is for their businesses.  For more information contact Automotive Assurance Group today at 844-242-6626.