By Jay Howard
Licensing & Compliance Administrator
This is Part 2 in a series examining the financial benefits of Risk Management for Dealers and their F&I portfolios. For Part 1, please click here.
One of the challenges facing risk managers in the F&I world is answering a simple question from dealers: “What do you do?” It’s challenging because the answer is always the same, and it’s always unsatisfying: “It depends.”
The analyses and solutions that risk management departments offer should be as varied and unique as the dealers they serve. While it might be tempting to throw money at each issue that arises, a one-size-fits-all approach to addressing the financial risks inherent in an F&I portfolio is a disservice to a dealer’s stakeholders. Product, losses, volume, and geography, along with dealer culture and history, should all be taken into consideration before a risk management team can recommend truly custom solutions.
Below are three case studies from different dealers in varying risk positions in their vehicle service contract books. Each book of business was analyzed by Service Group’s Risk Management Department, which then provided recommendations to each dealer tailored to their situation. The case studies demonstrate the need for, and the benefits of, thoughtful analysis and targeted solutions from a dedicated risk team.
Case Study No. 1: Changing Practices
In 2015, Service Group conducted a review of Dealer No. 1’s underperforming vehicle service contract business. The review revealed that issues with the handling of repair claims in the service drive were driving higher than expected losses. Service Group’s Risk Team recommended changes to practices in claims handling, including sign-offs from management on claims over $500, upsells, and parts in pairs.
The results were remarkable. The dealer’s loss ratio dropped from 95% in June of 2015 to just over 65% in December 2017, and the book saw $130,000 of additional underwriting profit over that time. Service Group now conducts bi-annual audits with the dealer to hold them accountable to the changes.
Additionally, the changes implemented to the practices in the service drive can help to mitigate the risk of manufacturer audits and chargebacks on in-warranty claims.
Case Study No. 2: Changing Product
Service Group identified Dealer No. 2 as a candidate for review in early 2017 due to high loss ratios. A claims review revealed an extremely high incidence of tire claims, and Service Group recommended the removal of that benefit from the product. As a result, the dealer’s loss ratio has declined by 35% in just over a year with no change in penetration.
Case Study No. 3: Changing Rate
When attempting to craft a solution to high loss ratios and declining profits, Service Group’s Risk Team views rate increases as a last resort. However, sometimes we find that a product simply is not adequately reserved for a dealer’s situation.
In March 2017, after a thorough review of Dealer No. 3’s vehicle service contract business, Service Group recommended adding $125 to the reserve for each contract sold. In the short time since implementing the new rate, loss ratios have declined by 12% year-over-year.