Why Auto Dealerships Choose Captive Auto Finance to Protect Risks
Countless auto dealerships are now self-insuring by implementing their own captive auto finance policies. Captive insurance companies allow businesses to have more control over everything from insurance costs to claims management. They are also more cost-effective than buying insurance through traditional market channels.
Self-Insure Types of Coverage
Your captive auto finance policy can cover a wide range of risks for your dealership. It’s up to you to decide which risks financially make sense to self-insure. Here is a list of the most common options chosen through a captive arrangement.
- Directors & Officer’s (D&O) Insurance
- General liability insurance
- Indirect business interruption insurance
- Legal defense insurance
- Professional liability insurance
- Repossession costs
- Warranty insurance
Covering other types of risks with captive insurance structures may not be cost efficient due to poor loss history. It is up to the dealership implementing captive insurance to determine which risks are better to go through the program and which should be sought out through traditional insurance channels.
Benefits
There are several benefits of adopting a captive auto finance policy for your dealership, offering you more control over setting insurance premiums, the insurance audit process and designing risk management programs. Captive structures give dealerships access to more affordable coverage than the open market with the types and amounts of insurance coverage they need.
Dealerships also benefit from the investment income and cash flow from using a captive insurance structure, meaning that from participating in the underwriting profits, you get to retain that profit through the captive company. You can earn investment income since you are not paying your own captive insurance premiums rather than paying an insurance company. Dealerships may be able to enjoy tax deductibility of premiums paid to its own captive insurance company resulting in a possibility to create a profit center out of something that would otherwise simply be an expense.
IRS Regulations
It’s important to remember to stay compliant when establishing a captive insurance structure for your dealership. Section 831(b) Micro-Captive Transactions from the IRS discusses dealerships’ obligations to make disclosures when certain transactions occur.
The Brown Plus Auto Dealers Practice can assist your dealership with accounting, tax and consulting needs. Contact us today to learn more!