In today’s fiercely competitive Powersports market, dealerships are seeking innovative ways to build long-term wealth while maintaining control over their profit centers. One of the most powerful strategies for achieving this is through reinsurance—a method often overlooked, but one that offers significant advantages in terms of financial growth. Many dealers, however, are either unaware of these benefits or uncertain when they’ve reached the right size to leverage reinsurance for their business.
How can reinsurance become a game-changer for dealers looking to secure their financial future?
Reinsurance vs. Overcharge/Pack: What Every Dealer Should Know
Many dealers remain focused on immediate revenue, relying heavily on overcharges or “packs” to boost their income. However, this strategy often leaves substantial long-term wealth on the table. When dealers “pack” products, they typically receive over remits that are taxed as ordinary income, which limits the opportunity for compounded investment growth.
For example, let’s take a dealer selling 50+ Vehicle Service Contracts (VSCs) per month, each with an average premium of $700. Imagine that $500 of each contract is ceded into the dealer’s reinsurance company. This would generate $300,000 annually. With a conservative 40% loss ratio, the dealer would retain $180,000. Over a 10-year period, with a 5% compounded investment return, this amount grows to $296,462. That’s almost $300,000 built through a strategy that many dealers simply overlook.
Understanding the Numbers: How Reinsurance Outpaces the Pack Model
Let’s dive deeper into the numbers. Selling 50 VSCs per month at a net reserve of $500 per contract allows your reinsurance company to accumulate both underwriting profits and investment income. Over time, the compounding effect becomes substantial, providing long-term stability and financial control.
By comparison, the traditional pack model often returns just $200 per contract from over remits, which is taxed as ordinary income. With 600 contracts annually (50 per month), this would generate $120,000 in revenue. However, after accounting for taxes—let’s say 30%—the net income would be $84,000. The savings potential of reinsurance far outpaces this approach.
The Savings Potential of Reinsurance
Now, picture shifting that pack income into your reinsurance company. By doing so, you could eliminate ordinary income taxes and instead generate reserves at $700 per contract. With the same production volume of 50+ contracts per month, this would yield $420,000 in reserves annually. After accounting for a 30% loss ratio, you would retain $294,000, which could be invested and compounded. Over 10 years at 5% monthly compounded interest, this amount grows to $484,221.
The Multiplier Effect: What Happens If You Own Multiple Stores?
For those Powersport dealers with multiple locations, the financial impact can be staggering. Imagine owning 10 stores, each selling 50 VSCs per month with an average premium of $700. This would generate $4.2 million annually in reserves. After accounting for a 30% loss ratio, you’d have $2.94 million left. With 5% monthly compounded interest over 10 years, this amount grows to a remarkable $4.84 million. This highlights the immense wealth-building potential of reinsurance when managing multiple dealerships.
Reinsurance is a versatile tool that extends beyond Vehicle Service Contracts (VSCs); it can encompass nearly all F&I offerings:
- GAP
- Tire and Wheel
- Paint and Fabric Protection
- Battery Replacement Programs
- Pre-Paid Maintenance
At Elevation, we partner with JGP Wealth and ensure that each Administrator operates under an Investment Policy Statement (IPS). This IPS outlines clear guidelines on how funds can be allocated, including the percentage of unearned premium that may be invested in equities versus more conservative options such as bonds or money market accounts. We provide detailed monthly statements and, at a minimum, conduct quarterly reviews of both performance and the investment policy to ensure alignment with strategic objectives.
The Bottom Line: Why Reinsurance Matters
When Powersport dealers shift their focus from short-term packs to long-term reinsurance strategies, the financial benefits are undeniable. Not only does reinsurance offer greater wealth-building potential, but it also provides dealers with more control over their business strategy.
At Elevation Dealer Services, we’re here to guide you through the process, ensuring you make informed decisions about when to transition to reinsurance and how to maximize your returns. Through our collaboration with Mark Sheffield, we’re committed to helping dealerships leverage reinsurance to build wealth, secure their financial future, and maintain control over their profit centers.
Don’t leave money on the table—explore the potential of reinsurance today and start building a strategy for long-term success.
Chad Staples
President
Elevation Dealer Services
602-677-6323
Chad@elevationdealerservices.com
Note from Mark J. Sheffield:
Many of my Spader/NCM 20 Group members ask about reinsurance. It’s not an area of the industry that I have a lot of expertise in. I worked with Chad to put this article together. Chad has worked in the insurance industry for 17 years, and specifically with Powersports dealers since 2014. Elevation Dealer Services was formed 2 years ago, and currently works with 280 dealers across the nation.