The Quiet Compounder: Turning Reinsurance into a Dealer’s Hidden Advantage
If you run a car dealership, you’re not just selling cars—you’re often selling protection. Service contracts, GAP coverage, tire and wheel programs—all of these give your customers peace of mind when the unexpected happens.
Now, here’s the interesting part: many dealers don’t just sell these products. They reinsure them. And that’s where the upside can be had.
The Basics
When you sell a service contract, you usually pass the risk to an insurance company. If the customer’s transmission fails, the insurer pays for the repair. You, as the dealer, get paid a commission and move on.
But with reinsurance, you set up your own company—often called a “reinsurance company.” Instead of taking a small taxable fee and sending remaining capital to the insurer, your reinsurance company assumes the risk and invests premiums while delaying taxes.
It’s a little like farming your own field instead of just renting it out—you participate in the harvest, not just the planting.
Why Dealers Do It
Reinsurance is attractive for a simple reason: profit retention. By reinsuring, the dealer captures service contract premiums rather than giving them away. Over time, this creates a significant pool of capital—capital that can compound if managed wisely.
Warren Buffet recognized the value of creating capital pools through reinsurance, evidenced by his purchase of Van Tuyl Group in 2014. Asked about the acquisition, Buffet noted, “Part of what we bought was their insurance company… and we paid a price accordingly… People should take a billion off the purchase price.” In other words, the Van Tuyl Group’s assets backing service contracts, GAP, etc. were so valuable in Buffet’s eyes that he was willing to pay an estimated 36% premium per store.
Where the Opportunities Lie
If you’re disciplined, money can accumulate in your reinsurance company, giving you long-term wealth that’s separate from the daily ups and downs of selling cars.
The winning formula is patience. Leave the profits to grow, make conservative assumptions about claims, and let compounding work its quiet benefits.
Auto dealer reinsurance is simply insurance for the insurance you sell. Done right, it’s a way to build lasting wealth from a business you already control. It’s not flashy. It won’t make headlines. In the end, it’s about building a second engine of profitability that keeps compounding long after the showroom lights go dark.
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