By Ryan Hanlon

You have to continually invest in your RV enterprise to grow and expand it, and financing those investments often requires borrowing money and repaying it with interest. It’s no different than taking out a mortgage to invest in a home or student loans to invest in your children’s future.

But RV dealers have a unique opportunity to turn the very concept of lending on its ear: By forming a reinsurance company, you can build a personal financial asset that grows with your business and, in time, can serve as a reliable source of financing.

When you borrow against your own underwriting profits, you essentially become your own lender. Not only do you get to call your own shots, your reinsurance company can earn the interest.

If this sounds too good to be true, I assure you it’s not. But if you want to join the thousands of RV dealers who have become their own lenders, you need to get on the right program and determine when and where to leverage your earnings. Here are five key steps:

1. Choose Your Structure.

As we have discussed, there are major differences between direct programs, retro plans, and reinsurance programs. To build the kind of reserve you need to become your own lender, you have to own your own reinsurance company.

Structures to consider include affiliated reinsurance companies (ARCs), also known as controlled foreign corporations (CFCs), as well as noncontrolled foreign corporations (NCFCs) and dealer-owned warranty companies (DWCs or DOWCs).

Each has its advantages and disadvantages, but RV dealers should exercise caution and seek a second tax opinion prior to entering into a new NCFC position, which has fallen out of favor since the passage of the 2017 Tax Cuts and Jobs Act.

2. Know What You Can Borrow Against.

Premiums are “earned” once the risk has expired and no claims can be filed. Reinsurance providers traditionally only allowed dealers to borrow against earned premiums. Unfortunately, that remains a very common restriction.

Borrowing against “unearned” premiums may appear risky on its face, but it’s a perfectly sound strategy that frees up significant additional capital. The best providers work with dealers to properly manage their risk and minimize loss ratios and will (or should) allow you to borrow against some portion of your unearned premiums.

3. Avoid Loan Programs.

Some reinsurance providers will say they allow loans but may be describing a loan program. If any of these restrictions apply, you’re not really borrowing from your reinsurance company; you’re borrowing from your provider:

  • Your provider earns all or part of the interest.
  • Loans incur fees paid to your provider.
  • Loans require written agreements with clawback provisions.

4. Build Capital.

Underwriting profits flow from the sale of insurable products. F&I training is a critical component, but you also have to manage your loss ratios and maximize service absorption. A good provider will work with you to manage all the moving parts and help you build more capital faster.

5. Put Your Money to Work.

RV dealers take loans from their reinsurance companies for all kinds of reasons, from buying a second dealership to building a second home. Some borrow to diversify their holdings or expand their footprints. During the lean years of 2008 and 2009, many leaned on their reinsurance companies to stay in business.

In prosperous times, you can get creative. A dealer I work with recently started a related finance company, funded with a loan from his reinsurance company at 3% interest. He finances customers at fair market rates and earns the arbitrage.

Reinsurance companies can and should make RV dealers financially independent. It’s just a matter of selecting the right program and provider and working together, over the long haul, to make it happen. For a quiet, confidential conversation about your options or your current structure, please don’t hesitate to reach out today.

Ryan Hanlon is a managing director for Portfolio, a leading provider of reinsurance and F&I programs for RV dealers, and a 16-year industry veteran. For more information or to schedule a confidential consultation with a Portfolio reinsurance expert, email inquiry@portfolioco.com today.