There is no question that the dealership insurance market is tightening up. Prices are going up along with deductibles including an ever-growing list of coverage limitations. Dealers’ physical damage or auto inventory insurance premiums and deductibles are rising even faster than other segments of the insurance market. Simply renewing your auto inventory insurance (that part not provided by a manufacturer’s flooring source) could be costly in many ways. Here are a few ideas and issues you need to be aware of before renewal.
Changing landscape – The auto inventory insurance landscape has changed dramatically in the last few years. It wasn’t very long ago that most dealers insured their new car inventory with the manufacturer and the used car inventory was insured by the garage carrier. Due to years of bad weather losses across the country many garage insurers are increasingly reluctant to write auto inventory coverage. Those that still do are raising premiums, deductibles and in many cases eliminating aggregate weather deductibles all together. Today more and more garage insurers are farming out auto inventory coverage to unrelated insurance companies, often with less favorable terms.
Deductibles – Most insurers are keeping comprehensive and collision deductibles steady while raising weather related per-car deductibles and eliminating aggregate deductibles even in parts of the country that do not normally see much in the way of weather-related claims. Manufacturer floor plans are often the only option when wanting an aggregate deductible. Dealers considering leaving a manufactures floor plan for want of lower interest rates should always consider the fact they will be moving to a much less favorable insurance market.
When considering weather deductibles, how big is too big? If the insurer is offering a $2,500 per-car deductible with no aggregate, what are you really getting for your premium dollar? In addition, a few insurers have moved to a percentage-of-total-loss deductible instead of a per-car deductible. These weather-related deductibles currently range from 10% to 30% of the adjusted loss. A percentage-of-loss deductible may be advantageous in the event of a light hail storm but could become financially problematic in the event of multiple totaled cars due to a tornado, hurricane or massive hail storm. The same concern holds true for dealers with high value cars.
A new wrinkle for dealers in flood prone areas is the requirement of an auto inventory flood evacuation plan to be approved by the insurance company. However, it is not enough to develop a plan, the dealership must follow it at the time of a weather event. The incentive is a lower deductible on damaged vehicles that were moved to higher ground and a much larger deductible on those left behind.
Flood exclusions – Flood exclusions for auto inventory have become much more prevalent. On numerous occasions we have found the insurer has added a flood exclusion at renewal without notice to the dealer. Flood plain maps have been re-drawn in recent years and some dealerships now find themselves in a 100-year flood plain when they were not before. Flood exclusions are often a separate page in the policy and not listed in the declarations page where deductibles, exclusions and limits are normally found. If the dealership is anywhere close to a body of water, river, creek or bayou one should inquire of the agent and check the physical damage coverage carefully for an auto inventory flood exclusion.
Parts and labor percentages – The standard reimbursement for parts and labor for work done on a dealership owned vehicle is 75%. The theory is that 75% of retail approximates the dealership’s cost and the dealership should not profit from repairing its own vehicles. Most insurers will negotiate parts and labor percentages as high as 100%. Certainly dealerships without a body shop may want to consider higher percentages but so should dealers in disaster prone areas where profitable business from a weather event could swamp the body shop. That said, it is not uncommon for insurers to limit the reimbursement percentage for weather-related occurrences to 75% which negates the whole reason for buying the higher reimbursement percentage. So when negotiating for higher parts and labor percentages, always make certain they apply to weather-related losses. As mentioned above, the endorsement reducing weather-related percentages back down to 75% is often separate and apart from the declarations page which will show the higher percentage.
Flat or variable inventory premiums – Most carriers adjust auto inventory premiums based on end-of-month values. Some however do charge a flat premium based on estimated or historical inventory values. Which is better? It depends. For dealers who expect rising inventory values over the policy term, a flat premium policy may be better. However, those looking to reduce their inventory may find a variable policy a better fit.
When comparing variable policies, look out for “low-balling.” Auto inventory policies have a policy limit normally higher than expected inventory levels. That limit however is not what the policy premium is based on. As an example, let’s say the agent decided to base the inventory premium on historical averages for a Toyota dealership. Last year as we know, Toyota inventories were significantly lower due to the tsunami. If the policy is variable and based on 2011 inventory levels, the dealership may well pay much more than the bid price. When comparing auto inventory bids make certain the agent reveals the inventory rating basis in addition to the policy limit.
As any dealer can see, this once mundane and simple coverage has become rather complex. As of this writing there are at least five carriers willing to write stand-alone auto inventory policies, so the dealer has options. Lower bank interest rates on floored inventory is certainly appealing but the loss of an aggregate deductible and other coverage issues should be considered before taking the leap from manufacturer to bank financing.