Many buy here/pay here (BHPH) dealers find that some of their customers are challenged by the requirement to acquire and maintain insurance on their vehicles. This challenge often arises because the customer’s insurance company requires too much down-payment, the insurance payment is on a monthly schedule- that the customer can’t budget for (that’s why many of you have the customers on weekly and bi-weekly payment schedules) and/or the cost of the insurance is just too expensive. The creditor that utilizes collateral protection insurance is able to provide an alternative to their customers that find it a challenge to comply with the insuring clause of the credit agreement. Moreover, collateral protection insurance can be profitable; and we show dealers, if they so choose, how to participate in the underwriting profit of the collateral protection insurance that would normally be retained by the insurance company.
Collateral protection insurance is a standard “bank product” that has been around approximately 40 years. If the bank’s customer failed to insure the vehicle, then the bank would buy insurance to protect its interest in the collateral and charge the cost to the customer - by adding it to the principal balance of the loan, where it collected interest charges, and send the customer a new payment book reflecting the added insurance charge.
The standard “bank” model collateral protection program wasn’t generally utilized by the BHPH industry because it would have required the dealer to “front” a year’s worth of premium, betting he could collect it back in monthly payments from the customer. Moreover, it was a negative cash-flow product using up cash the BHPH could more efficiently utilize in their business.
Several years ago, some companies in the collateral protection business were able to pull strings so the dealer could pay for the protection, that is - pay the premiums on a monthly basis as they collected it from the customer. The dealer is now able to obtain the protection without the negative cash-flow problem.
Collateral protection is, generally, a statutorily unregulated commercial insurance product between the creditor/dealer and the collateral protection company. Most states do not regulate collateral protection, though three (3) states regulate it through their insurance codes and eight (8), or so, regulate it through their finance codes.
The creditor is the only one insured in a collateral protection program, i.e. the debtor is never the insured and, specifically, has no interest in the collateral protection insurance program. Therefore, this is not the selling of insurance to the customer! This structure works in the car business, and especially in the BHPH business, because the customer rarely is in an equity position and thus, ultimately, has no insurable interest in the vehicle anyway. If the customer wants his interest covered, then he can comply with the insuring clause of the credit agreement and provide the creditor with a policy from his own insurance company naming the creditor as loss payee.
Again, the customer reimbursing the creditor, per the insuring clause of the credit agreement, for a cost the creditor incurred because the debtor was in default by not obtaining and/or maintaining insurance naming the creditor as loss payee is not the selling of insurance!
Many dealers are unaware of how much some of their customer’s are actually paying for the physical damage portion of their insurance. Customer’s are paying anywhere between $60 to $250 per month or more. These customer’s don’t often get multi-car discounts, have poor driving records (some with DUI’s), and we know they don’t have the best credit report - which insurance companies use to determine rates. All these issues affect the rate the insurance company charges the customer for “full coverage” insurance that protects the debtor and creditor’s interest.
As the creditor, all you care about is “is my collateral covered?” should the customer wreck the vehicle. Obviously, if the customer can’t drive the vehicle they are less inclined to keep making payments. So we want to be able to repair the customer’s vehicle. The customer just wants to be able to satisfy the insuring clause, so they aren't in default, and be able to do it in the most cost efficient manner. Collateral protection can satisfy the needs of both the creditor and the debtor.
Our collateral protection program allows the creditor to participate in one of three ways:
Collateral protection insurance is a standard “bank product” that has been around approximately 40 years. If the bank’s customer failed to insure the vehicle, then the bank would buy insurance to protect its interest in the collateral and charge the cost to the customer - by adding it to the principal balance of the loan, where it collected interest charges, and send the customer a new payment book reflecting the added insurance charge.
The standard “bank” model collateral protection program wasn’t generally utilized by the BHPH industry because it would have required the dealer to “front” a year’s worth of premium, betting he could collect it back in monthly payments from the customer. Moreover, it was a negative cash-flow product using up cash the BHPH could more efficiently utilize in their business.
Several years ago, some companies in the collateral protection business were able to pull strings so the dealer could pay for the protection, that is - pay the premiums on a monthly basis as they collected it from the customer. The dealer is now able to obtain the protection without the negative cash-flow problem.
Collateral protection is, generally, a statutorily unregulated commercial insurance product between the creditor/dealer and the collateral protection company. Most states do not regulate collateral protection, though three (3) states regulate it through their insurance codes and eight (8), or so, regulate it through their finance codes.
The creditor is the only one insured in a collateral protection program, i.e. the debtor is never the insured and, specifically, has no interest in the collateral protection insurance program. Therefore, this is not the selling of insurance to the customer! This structure works in the car business, and especially in the BHPH business, because the customer rarely is in an equity position and thus, ultimately, has no insurable interest in the vehicle anyway. If the customer wants his interest covered, then he can comply with the insuring clause of the credit agreement and provide the creditor with a policy from his own insurance company naming the creditor as loss payee.
Again, the customer reimbursing the creditor, per the insuring clause of the credit agreement, for a cost the creditor incurred because the debtor was in default by not obtaining and/or maintaining insurance naming the creditor as loss payee is not the selling of insurance!
Many dealers are unaware of how much some of their customer’s are actually paying for the physical damage portion of their insurance. Customer’s are paying anywhere between $60 to $250 per month or more. These customer’s don’t often get multi-car discounts, have poor driving records (some with DUI’s), and we know they don’t have the best credit report - which insurance companies use to determine rates. All these issues affect the rate the insurance company charges the customer for “full coverage” insurance that protects the debtor and creditor’s interest.
As the creditor, all you care about is “is my collateral covered?” should the customer wreck the vehicle. Obviously, if the customer can’t drive the vehicle they are less inclined to keep making payments. So we want to be able to repair the customer’s vehicle. The customer just wants to be able to satisfy the insuring clause, so they aren't in default, and be able to do it in the most cost efficient manner. Collateral protection can satisfy the needs of both the creditor and the debtor.
Our collateral protection program allows the creditor to participate in one of three ways:
- Since we do not, technically, pay an upfront commission, we can “advance” a retrospective commission (retro). No profit participation other than the advance.
- The creditor can choose to participate in the underwriting profit through a standard retro program.
- The most common and advantageous method of participation is the formation of a dealer-owned reinsurance company (a.k.a. producer-owned reinsurance company or PORC).
As an example, a PORC structure may be credited approximately $67 per month per car into the dealer’s reinsurance company for every vehicle enrolled in the collateral protection program. A dealer can expect approximately a 25%-30% penetration of his customer base in the first 90-120 days. Penetrations of 40%-50% of the customer base are not unheard of.
In closing, the reinsurance programs, including the reinsured collateral protection program, managed by us doesn't require a Trust Agreement or the establishment of a Trust Account. Funds are deposited into a bank of the dealer’s choosing with the dealer having full control over the bank account.
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