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Investing in Risk Management Pays Dividends - Part 1

By moconnell on 2/26/2018

By Jay Howard
Compliance & Administrative Services Manager

Over the last eight years auto dealerships have undergone a marked shift in their revenue sources. Since the end of the financial crisis in 2009, dealers across the industry have become increasingly dependent on F&I aftermarket sales to drive gross profits. According to NADA, in 2010, service contracts and other aftermarket products accounted for 15% of gross profits, and by 2016 that number was 23%.

The combination of increasing profits from aftermarket products, innovative profit-sharing and reinsurance arrangements, and an ever-changing regulatory landscape has led to a need for dealers to become more actively engaged in managing the various products sold in their F&I departments.

Most dealers have entered into, or at least considered, one or more of the myriad arrangements that allow them to participate in the back-end profits depending on the loss ratios and expenses associated with the service contracts and insurance products sold in their F&I office. However, far fewer have considered their need and ability to manage those books of business and their losses.

The first place to start in any risk management plan is establishing open and clear communication with product partners. A regularly scheduled service contract claims review with the product administrator, for example, can help dealer principals gain valuable insight into the practices of their service department. A provider or administrator with a robust risk management department can then make recommendations that, if implemented correctly, could reduce losses and increase dealer profits.

In addition to managing losses at the claim level, a product provider with an experienced risk management team can analyze a dealer’s loss history along with their profit-sharing or reinsurance arrangement, and create a modified rate structure customized to that dealer’s specific situation.

Managing claims and reserves aren’t the only pieces to the risk puzzle. Also looming is a complex web of state and federal regulations governing the wide range of products offered. The alphabet soup of regulatory authorities (OCCC, FTC, CFPB, etc.) carry the threat of fines and enforcement actions that will impact a dealer’s bottom line and reputation. It has therefore become critical that dealers focus on choosing partner providers with dedicated compliance departments. Leveraging the compliance departments of a product provider to navigate issues such as licensing, audits, and legal issues can save dealerships time and money.

For dealers of any size it has become clear that, given the increased volume and complexity of F&I products, a comprehensive risk management plan is no longer a luxury.