The unprecedented recovery is over – now what?
It’s been an incredible cycle the last 8 years as the auto industry came roaring back after the collapse in 08. We have now reach a plateau for new car sales and will likely hold below 18m new car sales for the next few years. With new car sales as the industry proxy for the performance of the Vehicle Service Contract space the leveling of sales is already driving change.
Without growth in vehicle sales the industry now has excess capacity in the provider space for administrators and underwriters. M&A in the provider space has slowed as the industry peaked and some F&I providers are now aggressively discounting and limiting services in some cases.
One challenge dealers face is that the industry is still relying on the same products with the same structures from decades ago – Vehicle Service Contracts and GAP. While some ancillary products have gained traction the big two remain Vehicle Service Contracts and GAP. Attachment rates are generally flat and Vehicle Service Contract prices are rising only slightly so no growth is expected from these areas. With used car prices dropping GAP pricing needs to rise and some in-force GAP programs are currently underwater. Many providers have not yet adjusted rates but it will need to happen soon.
Captive reinsurance structures are getting more exposure with the IRS with the recent Notice 2016-66 and the potential of a 15% tax rate puts into question the value of reinsurance versus other forms of profit participation.
So where is the next opportunity?
Beyond the natural cost compression that will benefit dealers other options exist to build out new models. Depending on a dealer’s size, geography, capabilities and objectives options include the creation of a true Joint Venture with a VSC provider, structuring a solution with groups (your 20 group for example) or obtaining a Contractual Liability Policy and creating your own program. These are just a few examples of what some dealers are doing today and others exist.
As dealers manage through a flat period in vehicle sales it’s important to review the success with their existing models and explore new options to maximize customer service and profitability.
Michael Frosch is President of Personal Safeguards Group, LLC, a leading specialty insurance and warranty advisory and brokerage firm.
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