He Wrote the Book on It

Max Zanan is no newcomer to the automotive industry. He’s a seasoned automotive expert with 20 years of experience in sales, finance-and-insurance, compliance, and dealership-management consulting.

His main goal is to help car dealers improve profitability while increasing customer satisfaction and retention. He’s a true industry thought leader, whether he’s organizing a conference, consulting with a dealership or keynoting an event.

He’s also authored five best-selling books on automotive management:

• “Perfect Dealership”
• “Car Business 101”
• “The Art and Science of Running a Car Dealership”
• “Effective Car Dealer”
• “Definitive Guide To F&I”

With his industry position as a thought leader, he’s trying to lead the charge for modernization of auto retail.

Auto Dealer Today caught up with Zanan recently to talk about his latest book, “Definitive Guide to F&I,” and trends shaping automotive retail and F&I.

ADT: What led you to write this book?

Zanan: I have held every position in a car dealership, from salesman to sales manager, finance manager to finance director, and general manager to platform president. After I left retail, I became an agent and provided F&I products to car dealers, along with training and income development. The first four books I wrote covered general management of car dealerships. I wrote them because in the automotive retail industry, there’s little formal education available and no licensing requirements. Anyone can go to a car dealership and get hired in sales. If that person is any good, within a few months they may be promoted to sales manager. Someone at the dealership will provide training for their new position. But in most cases, that person was promoted to their position in the same manner as the trainees. This is how bad habits are formed and transcend generations. It is the same with F&I. There’s a ton of sales training for finance managers. But sales training is secondary. F&I leaders also need to know how to manage the department, and what products to offer and why. I derive100% of my income from providing F&I products and realized I should write a book about F&I, not just general management.

ADT: Why did you focus a good part of the book on reinsurance?  

Zanan: Reinsurance is a very generic term that all dealers are familiar with. But most dealers do not understand reinsurance types and other aspects of reinsurance. Then they end up in reinsurance programs, where they pay out so much money that the generational wealth-building element being advertised is completely gone. The income is absorbed by fees that are kept hidden from dealer principals. I divided the book into three parts. One part focuses on management, another on selecting products to offer, and the third on selecting the right type of reinsurance program. I did that to demystify this highly complicated topic for dealer principals.

ADT: What is the basic concept of this complicated topic?

Zanan: Let’s start with a very simple example. A car dealer sells F&I products from a third party. A customer buys X, Y,Z vehicle service contract with their car. If the car breaks down, there is an 800 number on the contract. They call the number and file a claim, then get their car serviced. If it’s a legitimate claim, it gets paid. With this standard program, there’s no reinsurance, meaning the dealer makes money when he sells the product. If the cost of this vehicle service contract is $1,000, and the dealer sells it to you for $2,500, they book a $1,500 profit.

Reinsurance, in contrast, works like car insurance. Car owners pay an annual premium of $2,000 for car insurance. If they get into a fender-bender, the insurance company might pay out $500 to fix the vehicle. If nothing else happens to the vehicle, when the policy runs out at the end of the year, there’s $1,500 left after all the claims are paid. That’s $1,500 in underwriting profit for the insurance company. But the $2,000 the car owner pays to the automobile insurance company is not sitting in a noninterest-earning account. The insurance company invests the $2,000 and earns interest on it. At the end of the year, they have the $1,500 left in underwriting profit but also some investment income.

With reinsurance, if a customer buys a vehicle service contract for the same $2,000, and the cost of the contract is $1,000, the dealer books a $1,000 profit selling the contract and makes the check payable for $1,000 (premium dollars) to their own reinsurance company. If there is a $500 claim over the term of the contract, the $500 remaining is the underwriting profit that now belongs to the dealer, not to a third party. The dealer also can earn investment income from that $1,000 premium.

It’s basically a vehicle that allows the dealer to participate in underwriting profit and investment income. The best part is underwriting profit is not taxed, and investment income is only taxed at the dividend rate, not the ordinary income rate. It’s a very beneficial structure.

ADT: What types of reinsurance exist?  

Zanan: One is a controlled, foreign corporation (CFC). Another one is a noncontrolled foreign corporation (NCFC). There is also a dealer-owned warranty company (DOWC). They all basically do the same thing. And one is not necessarily better than the other. But sometimes one type might fit your needs better than another. If a dealer doesn’t understand the differences, he might end up in the wrong reinsurance program.

ADT: What can happen if a dealer is in the wrong plan?

Zanan: Opening a reinsurance company can come with very strict capital requirements. Some states require dealers to invest millions of dollars. To get around this requirement, dealers can domicile their reinsurance entities offshore. It’s much easier to structure a reinsurance entity offshore. Dealers can take a 953D election, which is an IRS election that recognizes the entity as an American corporation, even though it is a domicile.

There are also formation costs associated with reinsurance companies. The costs for a CFC can run $5,000 to $6,000. But with an NCFC, formation cost runs $25,000. DOWC costs are $500. Dealers need to consider the business they do before deciding on a structure that works best for them.

The problem is dealers have expertise in selling cars, parts and labor, but lack expertise in running a reinsurance company. So, they hire a third-party administrator to do the work. The administrator designs the contract and gets it approved by every state. They do the money transfer into the reinsurance company, claims adjudication, and reporting. A third-party administrator charges an administrative fee for this work. Every dealer knows about the admin fee and typically chooses the administrator offering the lowest admin fee. But sometimes the party with the lowest admin fee did not disclose all hidden fees that come with their services.

For example, there are companies that charge a loss-adjustment expense fee. If a customer files a $1,500 claim, the administrator will pay the claim and also tack on a loss-adjustment expense fee, which could equal up to 10% of the repair order. In this case, the fee would be $150. Now the dealer paid hundreds of dollars for the admin fee, and another $150 in a loss-adjustment expense. And no one disclosed the loss-adjustment expense fee in the beginning.

There are many examples of hidden fees. It’s vital that dealers examine the program to reveal all fees they will be required to pay. Reinsurance can be a separate stream of income, but it can quickly be eaten up by hidden fees.

ADT: What can dealers do to prevent situations like that?

Zanan: Transparency is key. If a dealer principal asks questions and cannot get an answer immediately from the third-party administrator, that’s a huge red flag. Also, third-party administrators report to car dealers on a monthly or quarterly basis, but some design these reports to be extremely confusing. When reports are very difficult to understand, it becomes very easy to hide extra fees.

ADT: Why should dealers do reinsurance reviews?

Zanan: The purpose of review is to have your finger on the pulse with losses because the name of the game is to make underwriting profit. There are no underwriting profits if losses exceed the premium. During review meetings, the goal is to make sure everything is being done properly at the dealership. A review might identify that the service department needs to do a better job prepping used cars for sale. Or it might show a need to exclude certain cars from coverage. For example, we know European cars are much more prone to breakdowns. Maybe it’s not worth it to reinsure these vehicles. These are things a good third-party administrator or general agent would bring to the table during a review.

ADT: What types of management problems exist within F&I departments?

Zanan: An F&I department does not exist in a vacuum. It’s part of a dealership. There has to be a direct connection between the finance department and the service department. The finance department sells different F&I products, such as vehicle service, tire-and-wheel, key replacement, paint and fabric protection contracts. If something goes wrong, a customer will visit the selling dealer’s service department. If the service department doesn’t know how to file a claim and whether there is a deductible, the customer will lose faith in the product and in the dealership itself. A good F&I manager should work with the service manager and make sure all service advisers know how to handle the products the department sells.

The most natural place to sell a service contract to the customer is actually in the service drive. But unfortunately, in the real world, it never happens. Most service advisers are not trained and equipped to sell these products. Dealers need to develop a written procedure so the service adviser can offer these products to the customer. If the customer says yes, what happens next? Can the service adviser create a contract in the system? Does the service adviser need to get a finance manager involved? How will the customer pay for it? Most customers don’t have $2,000 to $3,000 to pay for a service contract. Does the dealer have an option to provide zero APR financing so the customer can pay off the contract over 18 or 24 months at zero APR?

ADT: How do dealers decide what products to offer?

Zanan: It depends on what you’re looking to accomplish. My advice to all car dealers is to sell prepaid maintenance at the dealership. Here, the dealership service department changes oil, does tire rotations, and stuff like that. Unfortunately, with most contracts, customers can go to any dealership of that brand for maintenance. To me, this makes zero sense. If I’m selling you the car, I want to get your service business.  I want to sell or give away a maintenance plan that is only good at my dealership so I can build a relationship with you as I service your car.

ADT: Do A-to-Z sales processes make sense, where one person sells the car and F&I?

Zanan: In theory, it’s perfect. Unfortunately, the car business is complicated. Car dealers will tell you it’s difficult to find qualified finance managers and qualified salespeople. Imagine how hard it is to find a person who can do both! To me, it is completely unrealistic. I know of a dealership group in New Jersey that uses an A-to-Z process. Because they lack lending expertise and sales experience in selling F&I products, that dealership is leaving millions of dollars in profit on the table.

ADT: What trends are you seeing in F&I, and how can departments get one prepared for them?

Zanan: During the pandemic, profit shifted to the sales department. But as inventory is coming back, we’re getting back to normal, and profit margins are going to compress again. A dealer I know says that for the last 2 1/2 years, all car dealers were in a profit coma. Now they have to come out of this coma. If they don’t come out prepared, they will struggle. A dealership that lacks a properly trained and managed F&I department will be dead in the water.