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Frequently Asked Questions
Why should I consider owning my own Reinsurance Company?
Owning your own reinsurance company is a way of expanding your profit and having more control of your customers ownership experience. Third party warranty companies and insurance companies profit from premium reserves not used to pay claims. Reinsurance allows you to capture that profit instead.
Why don't most dealers own a Reinsurance Company?
Most larger dealers do own their own reinsurance company. Smaller dealers can be unaware of the benefits of reinsurance because they have not been marketed to due to volume.
What is the biggest misconception about Reinsurance?
The largest misconception is you must be very large in volume or that it costs a lot of money to get started. Neither are true!
How successful are dealer owned reinsurance companies?
The concept was introduced more than thirty years ago. Reinsurance companies have grown to become major factors in the marketing of credit life and extended vehicle service contracts. They have been instrumental in helping BHPH dealers turn problem areas such as collateral protection and warranting vehicles into profit centers. Dealers across the country have used reinsurance companies to build wealth greater than they had imagined.
Where should my reinsurance company be domiciled?
Your company can be formed in any country where legislation permits insurance companies to operate whether in the United States or elsewhere. The rapid growth of insurance companies domiciled outside the United States attests to the benefit of offshore locations. We have recommended formation of your reinsurance company in the Turks and Caicos Islands which is the first choice of most administrators. The government there has established specific regulations to allow the formation of reinsurance companies with a minimum of capital investment. They further allow all of the assets to remain in the United States.
Who controls the funds?
The Trust Agreement between the direct underwriting insurance company, the reinsurance company and the Trust Company, recites the responsibilities of each participant to the business program. The Trust Company is Trustee of the funds. The Trustee will invest reserve funds following restriction established by the Underwriting Insurance Company in very conservative government bonds typically earning short term rates in annual income. Investment income earned on these funds belongs to your reinsurance company. The Trust Agreement allows withdrawal for only four purposes. The first is for the payment of covered repair claims, the second is for limited professional fees, the third is for payment of income taxes and the final is withdrawal of any funds in the custodial account that exceed the required reserves. The withdrawal must have the Underwriting Insurance Company’s approval.
Do any of the funds go offshore?
All of the funds ceded to your reinsurance company are placed in your company’s account at a Trust Company in the United States. No funds are sent offshore.
Who controls the investments?
The funds placed in the custody and control of the Trust Company must be placed in investments acceptable to the insurance regulatory authorities that have jurisdiction over direct writing insurers. Laws regulating the investments of insurance companies are designed to preserve the financial soundness of these investments. The Trust Agreement requires regulatory guidelines be followed until balance sheet cash accumulated exceeds 125% of unearned premiums. Once that is attained, excess funds may be invested more aggressively and at the direction of the company ownership.
Will another dealer’s losses affect my company’s operating profits?
You will own 100% of your reinsurance company. Your company will only reinsure the business that your dealership writes through your F & I operations. No other company’s operations will affect the profits or losses of your company.
What if my company’s reserves are not adequate to pay the claims?
If your company is unable to meet its financial obligations, the ultimate liability for claim payments rests with the direct writing insurance company. Therefore, your liability will be limited to your formation costs plus any accumulated earnings in your company.
What is the extent of the shareholder’s liability?
This is a corporation and the liability of its shareholders is limited to the amount of their investment in the company.
How will my company be taxed?
Your reinsurance company will be subject to United Stated Federal income taxes even though it is domiciled offshore. Tax code sections allow a foreign insurance company to elect to be treated as a domestic insurance company. The election will be made when the company’s first Federal income tax return is filed. Because of their unique nature, insurance companies are taxed under a special set of provisions of the United States Internal Revenue Code. Your company will be taxed as a property and casualty insurance company. Property and casualty insurance companies with less than $2,200,000 in annual net premiums may elect to be taxed only on investment income under Internal Revenue Code 831 (b). These companies file form 1120PC annually. An insurance tax expert prepares all tax returns.
Who will advise me on the proper management of my reinsurance company?
Assured Vehicle Protection will maintain your company’s accounting records and will prepare your annual report that will be provided to the appointed tax preparer and the Turks and Caicos registered agent. AVP will prepare monthly financial statements detailing all activities of reinsurance operations. AVP, in conjunction with the direct writing insurance company will monitor claims losses and project such operations through contract earn out. DealerRE will meet with owners periodically to review the operations and financial direction of the company.
Can a dealer expect to be audited? Does the IRS frown on these?
The IRS no longer has reinsurance companies included in listed transactions. This is because they found most reviewed to be compliant. While we have not experienced audit volumes, no fear should be felt if properly organized and administered.
Who does the licensing and tax return for my reinsurance company?
We coordinate licensing and tax preparation.
Who Is Assured Vehicle Protection (AVP)?
AVP (Assured Vehicle Protection) is the administrator for your reinsurance company. DealerRE is an independent managing agency that works closely with AVP to help you manage your reinsurance company. AVP will handle many aspects of your reinsurance company, to include adjudication of claims, billing, tax returns, license renewal, etc. For more information on AVP, please visit the following link – http://www.avpadmin.com/