Reinsurance may not be one of the sexiest topics that auto dealers consider in running their businesses, but it nevertheless can pack a punch when it comes to their profitability related to finance-and-insurance sales. It will be featured at a Reinsurance Symposium at the upcoming Agent Entrepreneur eXchange in Las Vegas next month.

Agent Entrepreneur asked a couple of experts in the sector what they consider to be the hot issues around reinsurance this year.

Lee Bowron, partner with sector consultant Kerper and Bowron, and Michael LaMotta, chief executive of DOWC, which specializes in the space, share their insights to help guide agents as they steer dealer-clients on reinsurance: 

Q: Do you see any new trends taking shape around reinsurance in 2025?

Bowron: As we approach 2025, the landscape of finance-and-insurance auto dealer reinsurance is poised for transformation, driven by evolving economic conditions, regulatory changes, and dealer attitudes toward this wealth-building strategy. 

One of the most noticeable trends in F&I reinsurance is the push toward digitalization. With customer interactions becoming increasingly online, there's a growing emphasis on using data analytics to tailor F&I product offerings. This trend not only enhances personalization but also helps in predicting risk more accurately, potentially leading to more profitable reinsurance portfolios. Dealerships are likely to invest in technology that allows for real-time data analysis to optimize their reinsurance strategies.

The surge in electric-vehicle sales is influencing reinsurance models. Dealerships are beginning to adjust their reinsurance programs to account for the unique service and warranty needs of EVs, including battery life and technology-specific claims. This shift requires dealers to reassess the products they reinsure, ensuring that their offerings align with new automotive technology.

There's a trend toward more flexible or hybrid reinsurance models whereby dealers can switch between different participation structures based on their current business needs or market conditions. These models aim to offer dealers better control over their investments and profits, adapting to economic fluctuations or changes in dealership performance.

LaMotta: In 2025, we should see more dealers migrating to the DOWC (also known as a dealer-owned warranty company) structure as dealer groups continue to expand and consolidate. This trend reflects a growing preference for flexibility, profitability, and control compared to traditional reinsurance models. Dealers are increasingly leveraging DOWC to retain more profits and streamline operations.

Moreover, with evolving regulatory landscapes and an increasing emphasis on transparency, the DOWC structure positions dealers to respond nimbly while maintaining compliance. The year is likely to see more technology-driven solutions being integrated into the process, improving data tracking, claims management, and reporting efficiencies for DOWC programs.

Q: Are there economic concerns, given falling interest rates or any other shifts?

Bowron: The automotive industry continues to grapple with inflation, particularly impacting repair costs. This has a direct bearing on reinsurance profitability, as higher claim costs can erode reserves. Dealers are advised to review their reserve pricing strategies to account for these persistent inflationary pressures. The trend of increasing parts and labor costs suggests that reserve adequacy will be crucial for maintaining reinsurance profitability.

With interest rates stabilizing or potentially decreasing in 2025, there might be an opportunity for dealers to benefit from better investment yields on their reinsurance reserves. However, the economic environment remains uncertain, and dealers should consider investment strategies that are both conservative and adaptable to sudden market shifts.

LaMotta: We should start to see a reduction in the Fed rate, which will result in less expensive auto loans, making financing more accessible. This will hopefully bring a flurry of new buyers to the table, particularly first-time buyers and those looking to upgrade, which could drive increased sales across dealerships. For reinsurance, this means more opportunities to protect and support a higher volume of loans, which can boost overall profitability. 

Q: Are there any new regulatory considerations, either national, regional or local?

Bowron: Regulatory bodies continue to emphasize transparency and consumer protection in F&I practices. Increased scrutiny on offshore reinsurance structures also means dealers should be aware of any trends impacting the offshore entities. The Delaware Tribe has been successful in offering a low-cost option for on-shore reinsurance.

LaMotta: Dealerships must stay agile by keeping an eye on regulatory updates, investing in compliance training, and adjusting their operations as needed. This proactive approach ensures that reinsurance solutions remain effective, helping to reduce risks and making sure dealerships can stay on top of changing standards while keeping profitability on track. 

Q: What advice would you give to dealers evaluating their current reinsurance programs?

LaMotta: Dealers who have multiple reinsurance companies should consider consolidating to a DOWC or other structures. These structures also offer greater flexibility and control, enabling dealers to customize their programs, retain more profits, and respond more effectively to market shifts. Consolidation simplifies operations, reduces administrative overhead, and maximizes profitability by creating a unified approach to reinsurance. 

Q: What additional guidance would you offer to dealers about reinsurance?

Bowron: Before diving into reinsurance, understand the basics, including tax implications, investment strategies, and compliance requirements. 

If new to reinsurance, consider starting with a smaller, manageable portfolio to learn the ropes without overwhelming investment or exposure.

Partner with a reinsurance provider that offers transparency, education and support. Look for those with a strong track record in compliance and profitability.

Use data analytics to tailor your F&I products to market demands and adjust your reinsurance strategy accordingly.

View reinsurance as a long-term investment rather than a short-term profit center. Regularly review your strategy to adapt to market changes.

Be cautious with product selection for reinsurance. Not all F&I products are suitable for reinsurance due to risk profiles; assess each product critically.

Keep abreast of regulatory changes and ensure your reinsurance practices are always compliant to avoid legal pitfalls.

Despite the profitability of reinsurance, some dealers remain hesitant due to past regulatory issues or the complexity of managing a reinsurance company. However, the trend shows an increasing number of dealers recognizing the value of reinsurance as a long-term wealth-building tool, especially in economic downturns when traditional sales might not suffice.

As 2025 looms, dealers must navigate these trends with strategic foresight. Reinsurance can offer significant benefits but requires a commitment to understanding and adapting to an evolving economy and regulation. With the right approach, it remains a powerful tool for financial stability and growth in the automotive sector.

LaMotta: Look closely at fees and costs that might not be initially obvious or even disclosed. Dealers should scrutinize every aspect of their agreements, ensuring they fully understand how funds flow, what expenses are being deducted, and how profits are calculated and distributed. 

Hidden fees, such as administrative charges, premium ceding fees, or profit-sharing structures, can significantly erode the profitability of a reinsurance program over time.