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F&I Products For Your Dealership

By: Ben Steele, Sr. Advisor - Business Development

The use of F&I products and F&I reinsurance programs presents an opportunity for vehicle dealerships to expand their business. GPW and Associates, Inc. (GPW) is the industry leader in this field. The following is a high-level overview of F&I participation programs available to dealerships.

Traditional and alternative reinsurance programs come in many forms, subdivided into programs domesticated within the United States known as “on-shore” or “domestic” reinsurance programs and programs not domiciled in the United States known as “off-shore” reinsurance programs.

Domestic Reinsurance Programs

There are a variety of reasons a dealer might choose to participate in an on-shore reinsurance program. Two common reasons are:

  • The convenience factors of having the risk-taking entity domiciled locally; and

  • Reinsurance entity owners may not want to be seen as transacting business outside the U.S. or may want to avoid certain personal disclosures that are required with some off-shore programs.

1. Domestic Insurance Company

One option for a dealer is to form a captive insurance company domiciled domestically.

A dealer could form a captive to insure some of the non-insurance F&I products that are sold to customers.

Once the domicile state is selected and the captive insurance company is incorporated in that state, the company applies to the state Department of Insurance (DOI), which then will continue to regulate the company for the rest of its existence.

Minimum and ongoing capital and surplus requirements for captive insurance companies vary by domicile. Captive insurance companies must also comply with the captive insurance regulations where domiciled. Regulations include restrictions on types of investments, loans to affiliates, and distributions.

2. Obligor Programs

There are alternative ways a dealer can participate with a domestic F&I program that works like an insurance company without forming an insurance company. For non-insurance F&I products, the underlying contract issued to the customer lists a party responsible for legally fulfilling the terms of the contract. That party is referred to as the obligor.

Obligor programs have two main varieties: Administrator Obligor (AO) and Dealer Obligor (DO). Both obligor programs assume risks through contractual obligations but are not regulated as insurance companies by the states in which they operate and do not have to file forms or rates with the state and have greater flexibility in the product they offer to consumers. Some states have specific regulations on Vehicle Service Contracts (VSC) while not having the DOI involved in regulation.

The principal difference between AO and DO programs is the obligor. In a DO program, the dealership that sells the underlying F&I product is also the obligor on the contract. In an AO program, an administrative company is the obligor.

A dealer owned warranty corporation (DOWC) is an AO that has a limited number of clients. The DOWC is associated with one or more affiliated dealerships. Other than its limited number of clients, it is an AO.

Off-Shore Reinsurance Programs

Off-shore reinsurance programs are broadly grouped into two categories:

  • Controlled Foreign Corporations and

  • Non-Controlled Foreign Corporations.

There are many reasons a risk transfer program may choose a foreign domicile, including lower initial and ongoing capital and surplus requirements, as well as lower operating costs. The domicile also has a DOI (or equivalent regulatory body) that understands F&I risks and traditional reinsurance structures and provides an appropriate level of regulation. Favorable tax rates offered by the domicile or treaties between the foreign domicile and the U.S. may also factor into the decision.

1. Controlled Foreign Corporation (CFC)

The IRC defines a CFC as any foreign corporation where more than 50% of the vote or value of the stock is owned by a U.S. shareholder (USS) on any day of the tax year. For insurance companies, the percentage is 25%. A USS is a United States entity that owns more than 10% of voting rights or equity.

When discussing an F&I reinsurance arrangement, CFC refers to a controlled foreign corporation licensed as an insurance company in the foreign domicile that has made an election under IRC Section 953(d) to be treated as a domestic insurance company for U.S. income tax purposes. Historically referred to as Producer Owned Reinsurance Companies (PORCs), these are now referred to as either Producer Affiliated Reinsurance Companies (PARCs) or Affiliated Reinsurance Companies (ARCs).

In general, these companies operate in the same manner as described in Section 1 above.

2. Non-Controlled Foreign Corporation (NCFC)

An NCFC is not defined in the IRC; it is simply a term used to describe a foreign insurance company that is not a CFC. An NCFC that does not do business in the U.S. is not subject to federal income taxes.

The most common NCFC structure involves an off-shore reinsurance company with many unrelated owners who own participating stock. The business produced by each shareholder is assigned to their participating stock so that the value of their stock reflects the value of the business they produce.

Reinsurance Program Options

When considering the use of F&I products and reinsurance programs, it is important to know the types of programs available and to be able to select the correct program to fit your needs. It is crucial for dealers to partner with a trusted firm that understands the intricacies of the industry.

This is where GPW comes in. With our extensive relationships with manufacturers and administrators, GPW stands out as the industry leader in the establishment and ongoing management of F&I product participation programs.

GPW works with more manufacturers and administrators than any other firm, making GPW uniquely positioned to provide best-in-class service tailored to the specific needs and goals of your dealership. If you would like to learn more about reinsurance and other F&I product solutions, please contact a member of our team.


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