By Ryan Hanlon

If you have read about how reinsurance creates a personal financial asset RV dealers can capitalize on and borrow against, you probably picked up on the frequent mentions of unearned premiums.

Why is the ability to borrow against unearned premiums so important? Because all premium starts out as unearned, so limiting yourself to earned premiums severely restricts your borrowing power.

The real question is why so many reinsurance providers continue to put this restriction on RV dealers. Let’s take a closer look at how premiums earn out and how proper management can make borrowing against some portion of your unearned premiums a smart move.

The Earnout Curve

When you sell a 36-month service contract on a pre-owned RV, 1/36th (or just under 3%) of the risk expires each month. After three months, about 9% of your premium is earned and the remaining 91% is unearned.

When you sell a 72-month service contract on a new RV, there is an uneven earnout. The factory warranty will likely cover any mechanical breakdowns for at least three years, and the risk of breakdowns remains low for some time after that.

If you can only borrow against earned premiums, it’s going to take a long time to build up the available capital you need to seize new opportunities — and you may have to let some opportunities go as a result.

Where’s the Risk?

All companies perform best when they’re properly managed. Your reinsurance company is no exception. Providers who allow RV dealers to borrow against unearned premiums have figured out how to manage what may appear, on its face, to be a risky proposition.

Your provider should work with you to determine how much of your unearned premiums can be borrowed against. They will track your loss ratios and the frequency and severity of claims, adjusting premiums as needed — a process that should be happening whether or not you take loans from your reinsurance company.

If you tell your provider you want to wager the value of your reinsurance company on a spin of the roulette wheel, they should say that’s way too risky. If you tell your provider you want to buy an adjacent lot to expand your dealership and double your sales, they should tell you how much of your unearned premiums you can reasonably devote to the investment.

Stuck in Neutral

None of this is new information for reinsurance providers, yet many still allow RV dealers to borrow only against earned premiums. Their reason could be:

  • They’re not allowed. Some providers work with insurance carriers whose agreements prevent them from authorizing loans against unearned premiums.
  • They’re on the hook. Some carriers will authorize loans against unearned premiums but may hold the provider responsible if the loan is not repaid.
  • They want the interest. Some providers will allow RV dealers to borrow against unearned premiums, but only if the interest is paid to them — not to your reinsurance company.

Fortunately, most of the leading reinsurance providers have come to the conclusion that it’s our duty, whenever possible, to give RV dealers access to their capital. Some of us have been doing it a long time. Others are still trying to figure it out.

If you have any doubts about your current program or are ready to form your first reinsurance company, please contact us to schedule a quiet, confidential conversation 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.