Why Many Dealerships Choose Captive Auto Finance Policies to Protect Their Risks

Captive insurance companies offer businesses a way to take control over their insurance costs and the design of their risk management programs. Many auto dealerships have made the decision to establish their own captive auto finance policies to self-insure some of their risks in a more cost-effective way than they could have done by purchasing insurance through traditional market channels.

captive auto finance policies

Self-Insure Various Types of Coverage

It may not make sense financially to self-insure all of your dealership’s risks. However, your captive auto finance policy can be designed to cover a variety of risks. Some common options other dealerships choose to cover through a captive arrangement include the following:

  • Professional liability insurance
  • Directors & Officer’s (D&O) insurance
  • Warranty insurance
  • Repossession costs
  • General liability insurance
  • Legal defense insurance
  • Indirect business interruption insurance

With other types of risks, using a captive insurance structure may not be cost-effective because of poor loss history. The good news is that the dealership establishing the captive insurance company is squarely in the driver’s seat and can determine which types of risks to include in the program, and which would be better served through traditional insurance channels.

Benefits of Using Captive Auto Finance Policies

There are several reasons dealerships opt to go with captive insurance programs.

First, captive structures can give the dealership greater control over everything from setting insurance premiums to claims management. They can also lead to greater control over the insurance audit process.

Captives can also give dealerships access to the types and amounts of insurance coverage they need, even though they might have had a hard time finding that coverage on the open market (or trouble finding affordable coverage).

Dealerships may also enjoy the investment income and cash flow benefits that can come from using a captive insurance structure. Because you are participating in the underwriting profits when you use a captive structure, you get to retain that profit (through the captive company). You’re also not paying your own captive the insurance premiums rather than paying an insurance company, so you have an opportunity to earn investment income. The dealership may also be able to enjoy tax deductibility of premiums paid to its own captive insurance company. As a result, it is possible to create a profit center out of something that would otherwise simply be an expense.

A Word About IRS Regulations

Of course, when you establish a captive insurance structure for your dealership, it is critical to ensure it complies with all applicable regulations.

The IRS issued a notice in 2016 (Transaction of Interest – Section 831(b) Micro-Captive Transactions) describing dealerships’ obligation to make disclosures when certain transactions occur. Ask your tax advisor to explain how you can ensure your captive insurance company meets IRS requirements.

While Venture Captive doesn’t provide tax advice, we work closely with our dealership clients to ensure their insurance programs are designed to comply with all applicable laws.

Find Out How Venture Captive Management Can Help Your Dealership Protect Its Risks

At Venture Captive Management, we are committed to helping auto dealerships and other businesses protect their risks while gaining more control over their expenses. To learn more about establishing your own captive insurance company and to get started, contact us today at (770) 246-8535.