The Most Important Thing
Answer this question: When it comes to deciding what reinsurance program your dealership should choose, what is the most important question you should ask? Pencils down. A recent survey of the questions most often asked include-
· What is the administrator’s fee structure for the new reinsurance program?
· How often will the premium be ceded to my new reinsurance company?
· What is the procedure for declaring a dividend from the reinsurance company?
While all of these questions are significant in their own right, I believe that the most important question is also the most overlooked. When it comes to deciding what reinsurance program is best for your dealership, it is not how you get into the program that is important but rather how you get out. Want to know the most important question to ask when considering a reinsurance program? Here it is: What’s my exit strategy?
This idea of planning for the end may seem like common sense, but as Voltaire reminds us “Common sense is not so common.” From prenuptial agreements before marriage to peeking at the dessert menu before ordering dinner, looking towards the possible or inevitable end of a circumstance is ordinary. Unfortunately, all too often the same foresight is not afforded when selecting reinsurance or other participation program and the consequences can be costly.
Recently I visited with a dealer that had contacted our group requesting an analysis of his current program. He was concerned that he had not received any profit distribution even though the dealership had been with the program for a number of years and had written considerable business. After review, our team determined that the dealer was in a retrospective (retro) program that had extremely stringent production and loss experience requirements that the dealership had to meet before any distributions would be made. While the dealership’s loss experience was favorable, the production was not such that a distribution was allowed. Needless to say, the dealer was upset and contacted the program administrator indicating his desire to leave. He was informed that, in doing so, he would forfeit any potential profits he may become eligible for in the future. Another dealer we met with had become increasingly dissatisfied with the quality of in-store service his reinsurance program administrator was providing. When he contacted the administrator to leave, he was told essentially the same as the first dealer- “If you leave, you get nothing.” These two dealers are shackled with golden handcuffs and cannot get out of their existing program without financial loss.
With the ever-growing proliferation of profit participation programs being sold to dealers, it is more important than ever to be able to leave a program if necessary. Accordingly, here are some questions that should be asked of any service provider offering reinsurance or retro programs to your dealership.
· Under what circumstances can the dealership leave the program without penalty?
· If the dealership leaves the program, what happens to the business that has already been written?
· What happens to the program if circumstances within the dealership change (ownership changes, production declines, stores consolidate, etc.)?
· How would a sale of the dealership affect the program?
When entering into a new reinsurance program, dealers usually do proper due diligence in examining the up-front aspects of the program. They check fee structures, financial stability of the company promoting the program, cession methodology and in-store service. Often missed is the exit strategy. What happens if all that glitters is not gold? What if a better opportunity comes along? What if circumstances in the dealership change? The best programs have no hidden traps requiring dealers to stay against their will or risk financial loss. These programs operate under the same premise that good dealerships do- they earn the business in an ongoing fashion. If the dealer is not happy with the program in any way, he/she is free to seek other opportunities elsewhere without giving up a dime. So, when evaluating reinsurance programs, be sure to avoid programs that have “Hotel California” provisions built in. These hooks are easy to spot. Just look for the clauses in the contract that allow you to “check out anytime you like, but never leave.”