Reinsurance: The Hidden Value & Formation Fundamentals

In our continuing series on Reinsurance companies, this month we are addressing the “hidden” values in Reinsurance companies as well as some frequently asked questions about the formation process.

Reinsurance Companies should be a part of every well-positioned dealers’ comprehensive business strategy.  While the primary reason is their strong track record of profitability, it's yet another way for dealerships to hedge against unforeseen circumstances and secure another revenue stream against the endless “what ifs” of the world.

In 2009 Bob Cockerham, owner of Sante Fe New Mexico based Car World Kia, had the following to say to F & I Showroom: “This is as rough as it gets in the car business, and a reinsurance company is one way to manage through these rough times.”  Even in times far less dire than a recession, say simply an unforeseeable slump in sales or an ‘off’ year can be significantly offset by a Reinsurance Company that has amassed significant value.  

As the auto industry continues to evolve and become a more and more competitive environment, a Reinsurance Company can make all the difference in an owners growth and value of his companies over a relatively short period of time. Many dealers can find their Reinsurance company to be worth as much as their dealership.

Automotive Assurance Group are experts in forming and managing Reinsurance Companies.  We have the experience and expertise to make the process a seamless one.  Below are some of the most common questions dealers have about the formation process.

How do providers handle the setup of the reinsurance company?

Providers like Allstate and Warranty Solutions rely upon their qualified Agent Specialist to facilitate the setup of the reinsurance companies.  Automotive Assurance Group is able to help with the formation of reinsurance companies for our dealers.

What are the costs and fees associated with reinsurance?

Typical fees include:

Formation cost: It will usually run around $4000 for the attorney to create the company, turn key to include the License in Turks and Caicos and the preparation of all corporation documents and stock certificates, Tax ID number, 953d filings, and 831b election to become a US Tax paying small P&C company.

Ceding Fees: this is the fee charged by the admitted carrier who cedes (transfers the risk & premium reserves) to your reinsurance company. Usually expressed as a percent of the actual premium reserve amount. Ranges from 1% to 20% Some providers say zero, however they are just including it in the admininstration fee.

Premium Taxes: (based on actual amounts paid by the insurance company in the state of filing) Georgia is 2.25%

Custodial fees for trust account: Fees charged by the money manager that manages the brokerage account. Avg. is about 50 basis points or .5%

Renewal Fees and Books records and Tax Preparation: Done by the attorney and CPA firm that you hire to set up your company, usually about $3,800 per year taken from the reinsurance company account.

What forms/documents are required?

Dealer Agreements: With the provider that is administrating the products

Formation Document: With the attorney or firm setting up the company

Warehouse Agreement: With the provider to engage them to hold the premium until company is formed.

Shareholder Agreement: Assigns stock to owners of company

Reinsurance Treaties: From Provider, spells out the transfer of risk to the reinsurance company and how much gets transferred.

Custodial Trust Agreement: From the Provider spells out how the money is accessed and who can do what with the funds.

What percent is ceded to the reinsurer?

We cede 100% of the written premium monthly, allowing maximum investment opportunity. This is not always the case. Some do a spit ceding, only giving a percentage of earned and unearned premium as it earns out over time. Also some cede quarterly instead of monthly.

Is there a capital requirement?

The IRS established with TAM 2002-70 and later in TAM 2004-60 that reinsurance companies, in order to be considered as a viable insurance company, must start with an initial paid in capital. They however never said what that amount should be.  We strongly advise you to capitalize the company with an amount that makes sense for the amount of starting risk, at least $5,000.  Allstate and Warranty Solutions do not determine your initial trust deposit to setup a reinsurance company.

Where can I domicile my reinsurance company?

In the country that issues the company an insurance or reinsurance license, and has active treaty’s with the US to act in a compliant manner. We use Turks and Caicos, the most predominant domicile of economic convenience. However, we caution against some providers that will set up a company in Seychelles or other domiciles that forbid reinsurance or insurance to be part of the charter. They will create a work-around method trying to establish the company as a different kind of entity, yet try to use the 953d and 831b laws to gain preferential tax treatment.

Coming up next month, a look into the tax preferential treatment afforded to properly structured reinsurance companies.    

In addition to step by step assistance throughout the formation process, Automotive Assurance Group constantly monitors the performance of our dealers reinsurance companies and regularly communicates to our dealers with feedback, reports and statistical information.  Contact AAG today to get started with your reinsurance company!