Advantages of Reinsurance
The advantages and benefits of a Reinsurance program include:
- Maximize participation in the potential underwriting profits of the F&I products reinsured
- Maximize participation in potential investment income on reserves (both earned and unearned)
- Program is under the control of the dealer/shareholder and is completely portable
- Ability to self-direct part of the investment portfolio (earned funds)
- Offers unique opportunities for estate planning and/or retention of key employees
- Program may qualify for preferential tax benefits (i.e. small life insurance company deduction or small P&C company election)
- Deferral of taxation to shareholders (shareholders are not taxed until they take distributions)
- Distributions to shareholders may qualify for preferential tax treatment – may be treated as “qualified” dividends or long term capital gains
Common types of reinsurance companies include PARCs and DOWCs.
A Producer Affiliated Reinsurance Company (PARC) is a corporation formed either in the United States or offshore for the purpose of reinsuring F&I products sold through affiliated automobile dealership(s) or banks/financing entities. These F&I products typically include one or more of the following: vehicle service contracts (VSC), limited warranty, Guaranteed Asset Protection (GAP), etch/theft products, credit insurance, etc.
A Dealer Owned Warranty Company (DOWC) is an administrative corporation (C Corp) designed to be the obligor for non-insurance F&I products such as VSCs. The company is not regulated as an insurance company, but typically qualifies as an insurance company for federal income tax purposes. The DOWC is generally owned by a dealer or a dealer group and is administered by a third party provider. The DOWC often purchases an excess of loss insurance provided by a third party insurance company.