A term used to describe an insurance company licensed to do business by a state’s DOl.

A reinsurance arrangement involving a controlled foreign corporation that has made a 953(d) election to be treated a as a domestic company for SU income tax purposes.

To accept insurance risk. In the insurance industry, “assume” generally refers to a part taking on risk or accepting liability for potential losses associated with a particular policy or set of policies. When an organization assumes risk, they are agreeing to pay out claims that are covered under the policy or policies in question, up to the specified limits of coverage.

An assuming insurer or reinsurer is an insurance company that agrees to take on some or all of the risk associated with policies issued by another insurance company. The assuming insurer or reinsurer typically receives a portion of the premiums paid by the original insurer’s policyholders in exchange for assuming a portion of the risk of potential losses associated with those policies. This allows the original insurer to reduce their overall risk exposure and maintain sufficient capital to meet their obligations to policyholders.An insurer/reinsurer accepting risk/liability.

“Cede” means to transfer a portion or all of an insurance-type risk from one insurer to another. The insurer transferring the risk is known as the ceding insurer, and the insurer accepting the risk is known as the assuming insurer or reinsurer. This transfer of risk may be done through a reinsurance agreement or other contractual arrangement, and the ceding insurer typically pays a premium to the assuming insurer for assuming the risk.

A primary insurer (direct writer) who transfers  or cedes a portion of the risk associated with policies it has issued to another insurer, known as a reinsurer. The ceding insurer typically pays a premium to the reinsurer in exchange for assuming a portion of the risk of potential losses associated with the policies. This allows the ceding insurer to reduce its overall risk exposure and maintain sufficient capital to meet its obligations to policyholders.

A Cession Statement is a periodic statement – also  known as a “reinsurance bordereau.” It is a detailed report prepared by a ceding insurer to provide information about the underwriting activity associated with a particular set of policies that have been reinsured by a third-party reinsurer. A Cession Statement typically includes information about premiums, acquisition fees, claims, loss adjustment expenses, and other relevant data, as specified in the corresponding reinsurance agreement. The statement is used by the reinsurer to reconcile its records with those of the ceding insurer and to calculate the amount of cession cash due, as well as to determine the appropriate level of reserves required to cover potential losses associated with the reinsured policies.

Claims that have occurred but not been paid. For F&I products, they generally fall into two categories: IBNR and ICOS.

Refers to the insurance policy issued by a primary insurer to insure the performance of a non- insurance F&I product. The CLIP may be issued to an administrator and can be in several variations (“first dollar,” “failure to perform,” or “excess of loss”). For traditional reinsurance programs, the CLIP premium is the premium reinsured through the reinsurance program.

Failure to Perform is a type of CLIP which requires the obligor to first fail to perform its obligation under the contract (e.g. become bankrupt or insolvent) before the insurance company can be called upon to pay claims and refunds.

A Dealer Owned Warranty Company (DOWC) is a type of vehicle service contract provider that is typically owned and operated by an automotive dealership or dealer group. DOWCs offer extended warranty coverage and other vehicle service contracts to customers who purchase new or used vehicles from the dealership.

Unlike third-party providers of service contracts, a DOWC is owned and controlled by the dealership, which can provide more flexibility in terms of pricing and coverage options. DOWCs can also be more integrated with the dealership’s service department, which can lead to a more seamless customer experience when it comes to submitting and processing claims.

A dealer should consider moving to a Dealer-Owned Warranty Company (DOWC) when they want to have more control over their warranty program and potentially increase their profitability. With a DOWC, the dealer has ownership of the warranty company and can customize coverage, pricing, and claims processing.

Potential Tax Benefits:

One potential tax benefit of DOWCs is the ability to deduct the cost of warranty claims as a business expense. When a customer files a claim on their warranty, the DOWC will cover the cost of repairs or maintenance. The dealership can then deduct the cost of these claims as a business expense, which can help reduce their taxable income.

Another potential tax benefit is the ability to depreciate the cost of the warranty over time. Depreciation is the process of deducting the cost of an asset over its useful life. Because a DOWC is an asset owned by the dealership, they may be able to depreciate the cost of the warranty over several years. This can help reduce the dealership’s taxable income and provide a financial benefit over time.

DOWCs may also be able to take advantage of certain tax credits. For example, if the dealership offers a high-tech warranty that includes advanced technology features, they may be eligible for tax credits related to research and development. These tax credits can help offset the cost of offering the warranty and provide a financial benefit to the dealership.

It’s important to note that the tax benefits of DOWCs may vary depending on the specific circumstances of the dealership and the warranty program. Dealerships should consult with a tax professional to determine the potential tax benefits of a DOWC for their specific situation.

Deferred Acquisition Cost (DAC) or Premium Acquisition Expenses (PAE) refer to the costs incurred by insurance companies to acquire new policies or renew existing policies. These costs include commissions paid to agents or brokers, underwriting and policy issuance costs, and other expenses related to acquiring and maintaining policies.

DAC or PAE are capitalized as an asset on an insurance company’s balance sheet because they represent future economic benefits that are expected to be realized over the term of the policies. However, rather than being expensed immediately, these costs are spread out over the life of the policies in proportion to the expected revenue generated by the policies.

The amortization of DAC or PAE is typically calculated using actuarial methods and is based on assumptions about policy renewals, lapses, and other factors that may affect the future profitability of the policies. The process of amortization reduces the value of the DAC or PAE asset over time as the economic benefits are realized.

Extended Vehicle Service Contracts (ESC) – also referred to as Extended Warranty Contracts (EWC) – are contracts that provide additional coverage for vehicle repairs and maintenance beyond the manufacturer’s warranty. ESCs are often sold by dealerships or third-party providers and can cover various components of a vehicle, such as the engine, transmission, or electrical system.

Dealers should be aware of the following key points when offering or selling Extended Service Contracts (ESC):

• Coverage and Limitations: Dealers should clearly explain the coverage and limitations of the ESC to the customer, including what specific components are covered, any deductibles or co-pays, and any limits on the total payout or the number of repairs covered.
• Cost and Financing: Dealers should be transparent about the cost of the ESC, including the total price and any financing terms. It is also important to ensure that any financing agreements comply with applicable laws and regulations.
• Claims Process: Dealers should explain the claims process to the customer, including how to file a claim, how the repair facility will be paid, and any documentation required.
• Provider Reputation: Dealers should carefully evaluate and select the ESC provider to ensure that they have a strong reputation for customer service and paying claims in a timely manner.
• Compliance: Dealers must comply with all applicable laws and regulations related to the sale and financing of ESCs, including disclosure requirements and restrictions on the types of fees that can be charged.

Guaranteed Asset Protection (GAP) is a type of insurance sold in automotive retail that covers the difference between the actual cash value of a vehicle and the outstanding balance on the loan or lease in the event that the vehicle is stolen or totaled in an accident. This helps protect the buyer from financial loss in the event of a total loss, as the insurance payout may not cover the full amount owed on the vehicle.

In Course of Settlement (ICOS) reserves are established by insurance companies to estimate the ultimate cost of reported claims. These reserves are adjusted regularly as the claims are being processed and repairs are completed, based on new information about the costs involved. The goal is to ensure that the reserves accurately reflect the expected cost of the claim when it is finally closed. By doing so, organizations can better manage their financial risk and provide more accurate financial statements.

Incurred Basis claims settlement is a method to determine financial liability for claims that have been reported but not yet settled. Under this method, the insurance company recognizes the expenses associated with the claim as they are incurred, rather than waiting until the claim is fully settled. This means that the insurance company will record its best estimate of the total cost of the claim in its financial statements, even if the final cost is not yet known. Once the claim is settled, the insurance company will adjust its financial statements to reflect the actual cost of the claim. This method allows companies to more accurately estimate their financial liabilities and provide more transparent financial statements.

Incurred But Not Reported (IBNR) reserves are estimates of the potential future claims that have occurred but have not yet been reported to the insurance company. These reserves are used to account for the expected costs of future claims that are likely to arise but have not yet been recorded in the insurer’s financial statements. IBNR reserves are typically established based on statistical analysis of historical claims data, which allows the insurer to estimate the frequency and severity of future claims. The goal of IBNR reserves is to ensure that the insurer has adequate funds to pay for claims that have not yet been reported and to prevent under-reserving, which could lead to financial instability.

“Dealer obligor” is a term used in the finance and insurance (F&I) industry to describe a car dealer or other entity that assumes financial responsibility for certain types of loans or insurance policies sold to customers. In the context of car sales, a dealer obligor may offer loans or leases to customers through their financing arm, in which case they become the primary lender and assume the financial risk associated with those loans or leases. Similarly, a dealer obligor may offer insurance products such as vehicle service contracts or guaranteed asset protection (GAP) to customers, and in such cases, they become financially responsible for fulfilling the obligations of those policies. The term “dealer obligor” emphasizes the financial obligations and risks associated with such arrangements

A Producer Affiliated Reinsurance Company (PARC) is a type of reinsurance company that is affiliated with a producer or dealer of a particular product or service. In the automotive industry, a PARC is typically associated with a car dealership or a Dealer-Owned Warranty Company (DOWC).

A PARC is created when a dealership or DOWC forms a separate legal entity that acts as a reinsurance company. This reinsurance company then provides reinsurance coverage to the dealership or DOWC. The dealership or DOWC pays premiums to the reinsurance company, which in turn assumes a portion of the risk associated with providing extended warranty coverage to customers.

The use of a PARC allows the dealership or DOWC to reduce its exposure to risk and potentially earn additional profits. The reinsurance company assumes a portion of the risk associated with providing extended warranty coverage, which can reduce the amount of risk that the dealership or DOWC has on its books. Additionally, the reinsurance company can invest the premiums it collects, potentially earning additional income.

PARCs also offer potential tax benefits to the dealership or DOWC. Like DOWCs, PARCs may be able to deduct the cost of warranty claims as a business expense and depreciate the cost of the reinsurance over time. PARCs may also be able to take advantage of certain tax credits related to research and development, depending on the nature of the extended warranty coverage they provide.

It’s important to note that the use of a PARC can be complex and may require the involvement of legal and financial professionals. Dealerships and DOWCs should carefully evaluate the potential benefits and risks associated with a PARC before implementing this type of reinsurance structure.

A Producer Owned Reinsurance Company (PORC) is a reinsurance company that is owned by insurance producers, such as agents or brokers, rather than traditional shareholders. The purpose of a PORC is to allow insurance producers to retain more control over their underwriting and claims processes and to share in the profits of the reinsurance company. PORCs are typically used by smaller insurance agencies or brokers who do not have the resources to establish their own reinsurance company.

In the context of automotive F&I (Finance and Insurance), a Third-Party Administrator (TPA) is a company that provides administrative services and support to automotive dealerships and their F&I departments. TPAs typically handle the back-end functions of F&I products, such as warranty and insurance programs, by processing claims, managing payments, and providing customer support.

In the F&I context, TPAs act as intermediaries between the dealerships and the insurers or underwriters that provide the F&I products. They are responsible for ensuring that F&I products are properly integrated into the dealership’s sales process, compliant with regulations, and profitable for both the dealership and the insurer. TPAs may also offer consulting services to help dealerships optimize their F&I operations and increase revenue.

Unearned Premium Reserves (UPR) refer to the portion of an insurance premium that has been paid by the customer but has not yet been earned by the insurer. In other words, UPR represents the amount of money that the insurer owes to the customer if the policy is canceled before the end of the coverage period.

In the F&I context, UPR is an important concept because many F&I products, such as extended warranties or service contracts, are sold with a term of several years. As a result, the insurer collects the full premium upfront, but only earns a portion of the premium each year as the coverage is provided. The unearned portion of the premium is held in reserve to ensure that the insurer can fulfill its obligations to customers if the policy is canceled or if claims are made.

UPR is an important metric for insurers and their regulators because it represents a liability on the insurer’s balance sheet. Insurers are required to maintain adequate reserves to cover their UPR obligations, and failure to do so can result in financial penalties or regulatory action.