Article
How RV dealerships can improve financial agility with reinsurance
Oct. 15, 2024 · Authored by Breanne Eagles and Brittany Richards
This article was originally published in the RV Executive Today July 2024 issue.
Cash flow management is a major contributor to a business' financial health and agility. Many RV dealers are using dealer-owned reinsurance companies to achieve long-term financial goals and expand their cash flow capabilities.
With the increase in the number of administrators and agents who focus on products exclusively for automotive and RV dealers, the set-up and maintenance of reinsurance companies has become less burdensome for dealers making it a cash flow management tool worthy of consideration.
Explore the potential cash flow outcomes of having a reinsurance company in your finance toolkit and how this opportunity may benefit your business.
Dealer-owned reinsurance company basics
A reinsurance company assumes risk from another insurance company. While there are many different types and forms of reinsurance contracts, a dealer-owned reinsurance company involves the reinsurer assuming the risk of claims related to finance and insurance products that are sold by a dealership to end consumers such as vehicle service contracts and guaranteed asset protection policies.
The original insurer transfers premium reserves less fees to the reinsurance company which is owned by the dealer or other beneficiaries. The reinsurance company’s cash flow comes from underwriting profits as well as income from investing the premiums.
As with any company, there are risks in reinsurance companies and no cash flow is guaranteed.
Potential cash flow benefits
The most straight forward cash flow benefit resulting from a dealer-owned reinsurance company is the deferral of income for federal income tax purposes. The income associated with the finance and insurance products is deferred until such time as the income from the reinsurance company is distributed either through normal distributions or a liquidating distribution. Income from the investment earnings on the accumulated reserves remains taxable under an Internal Revenue Code Section 831(b) structure.
The benefits of this deferral are two-fold:
Related sections
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.