By Ryan Hanlon
There is nothing illegal, unethical or untoward about reinsurance. Yet in my meetings with RV dealers, the same old myths and misconceptions still tend to resurface.
Let’s confront each of those myths and separate reinsurance fact from reinsurance fiction.
Myth No. 1: Reinsurance is risky and mysterious.
RV dealers form reinsurance companies to capture some or all of the underwriting profits on the insurable products sold at your dealerships. The word “reinsurance” means different things in different contexts, but it always refers to the transfer of risk from one party to another. Assume the risk, enjoy the rewards.
So why does reinsurance still have an air of mystery about it? I believe there are two reasons.
First, as we have discussed, when reinsurance was taking off among auto dealers, the industry did not do a great job of selling itself to RV dealers.
Second, factories and insurers have never been eager to part with their underwriting profits. I couldn’t blame them for actively discouraging dealers from forming their own reinsurance companies or steering them into direct programs. And if those dealers already have doubts about reinsurance, it’s an easy sell.
Myth No. 2: Reinsurance is a tax dodge.
You are required to report and pay taxes on your earnings, period. Depending on the structure you choose, your reinsurance company profits may be taxed at qualified dividend rates, which are significantly lower than most dealership income tax rates. That is a huge advantage but hardly a tax dodge.
Myth No. 3: Your reinsurance earnings must be held in offshore accounts.
Depending on the structure you choose, your reinsurance company may be domiciled offshore, but that doesn’t necessarily mean the money goes offshore. Most dealers direct their reinsurance company earnings to their investment accounts.
One example is the affiliated reinsurance company (ARC) structure, a foreign domiciled company that has made a 953(d) tax election and for which all monies are held at a financial institution within the United States.
One notable exception — and the likely source of this myth — is the noncontrolled foreign corporation (NCFC) structure. The Trump administration’s 2017 Tax Cuts and Jobs Act made this structure significantly less desirable from a taxation standpoint, and it is not being widely marketed now.
Myth No. 4: Reinsurance is not right for you.
Have you ever heard that, if you don’t sell 50 service contracts a month, you don’t qualify to own a reinsurance company? Well, if you do sell 50 service contracts a month, you should own at least one. But that’s not a requirement.
Hypothetically, let’s say you can write $250,000 in premiums and expect to pay $150,000 in claims. With investment income and minus taxes and fees, you could get to $1 million in as little as seven years.
That might not put you on the cover of RV PRO. But you might pay off your mortgage, buy a second home or put three kids through college, all with earnings that didn’t exist before you formed your reinsurance company.
Myth No. 5: Factory or direct programs are just as good as third-party programs.
Direct programs are a low-cost, low-risk alternative to true reinsurance company ownership. Your provider groups your contracts with those sold by other dealers, manages the risk, and sends each dealer a small portion of the underwriting profits.
Make no mistake: Direct programs can be the right choice for smaller RV dealers, particularly those who are diving into reinsurance for the first time.
But you have to explore all your options. A side-by-side comparison of direct and third-party programs should show more earnings taxed at a lower rate. Don’t let any provider mislead you by inflating the projected profitability of their direct program and deflating that of a third-party program to make it look like a push.
Have you heard any myths we haven’t listed here? If so, please let us know, and as always, feel free to reach out anytime for a quiet, confidential conversation about reinsurance.
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.
