The first panel discussion of this year’s P&A Leadership Summit began at 2:05 p.m. on Tuesday, Aug. 30. Helmed by Jimmy Atkinson, senior vice president and COO of AUL Corp., “Threats Facing the F&I Industry” promised to tackle the various forces working against dealers, agents, product providers and third-party administrators (TPAs) today and in the near future.
Atkinson was joined by a diverse panel of experts that included David Pryor, CMO of Safe-Guard Products International, Mike Saint, lead risk analyst for Assurant Risk Management, and Tony Wanderon, CEO of National Auto Care, David Neuenschwander, vice president of National Automotive Experts (NAE)/NWAN, was unable to appear but did contribute questions to the panel.
Anticipating a Downturn
The discussion started off with a warning: Don’t get complacent. The panelists agreed that the automotive industry as a whole has been strong for the last few years, leading many to take success for granted and forget to ensure the basics are all covered.
“The challenging thing for me right now is a lot of companies seem to have forgotten the bad times,” Wanderon said. “Things have been good for so many years that they don’t really have a disaster recovery [plan] in place. I always get scared a little bit when things are so good — you forget the little things. Disaster recovery is figuring out your expenses, having all the right people in place and figuring out which business might be at risk.”
Pryor agreed, noting that new-vehicle sales have likely plateaued after passing the 17 million-unit mark in 2015.
“I think we’re looking at that and saying, ‘What’s next?’” Pryor said. “Dealers are resilient. They’re going to continue to look at ways to drive their bottom line and drive their profitability. As an administrator, there’s sometimes a silver lining when we do face a downturn, or at least an era of stagnant growth. Dealers start to look at other parts of their business.”
Specifically, Pryor noted, dealers will refocus on F&I and fixed operations, both of which are susceptible to inertia when times are good and cars are flying over the curb. He urged providers to offer a wide range of proven products that will maximize profits and customer satisfaction in any economic climate.
The subject then turned to the digitization of F&I, beginning with information about products on provider and dealer sites and evolving to an Amazon-like experience that would allow car buyers to select and price protection products the same way they spec the vehicle.
Whether the industry likes it or not, Pryor said, the virtual space is going to play a large role in the future of F&I.
“We know it’s coming. We can look at what has happened on the vehicle sales side,” Pryor said. “Customers are doing their shopping online. They’re only visiting 1.2 dealerships before making the decision to buy. The sales process is happening in the digital space.”
Atkinson reminded the panel that information about F&I products is already out there, but the typical source is a dissatisfied customer. “When a customer hits their phone and Googles an F&I product, the first thing they see is something negative.”
Wanderon agreed, noting that bad reviews are spreading faster than ever. “Social media is changing things for us in a lot of different ways,” he said. “I think it’s time for us as an industry to start talking about what we do and how we do it and how we take care of customers.”
As an example, Wanderon told a story of a working F&I manager who purchased a service contract he had sold to his own customers. When a strut had to be replaced, his claim was denied, and he took to social media to vent his frustrations — before contacting the provider. If he had, he would have learned that part wasn’t covered.
“To get a negative response, you don’t ever have to ask your customer to post that,” Wanderon pointed out. “They’re going to post it. But to get a positive response, you should be asking your customers to go out there and post for you the same way, especially when you’re doing things that are outside the coverage provisions of your contract and you’re making an exception for them.”
Saint agreed, saying that dealers and providers need to get more proactive. “I think anybody in F&I should be very prepared to offer instances where there was a positive [experience] for the customer. I think we all need to pick it up as far as having educational items on websites. Just like they spec out the car before they buy it, well, they should be able to spec out the products we have as well. Because the customers are more and more educated. That’s the avenue I think we can expand into.”
“It doesn’t have to be just the administrator,” Pryor said. “Ask your dealers to go out and put those things out there.” Using GAP coverage as an example, Pryor noted that finance sources are stretching terms and loan-to-value ratios, leaving car buyers underwater for historically long periods. “Here’s a great product that protects them. We see $20,000 and $30,000 checks going out. That makes a huge difference to someone. ... So how do we get them to go online and push that message out there? ‘This is a great product, I had a great experience with it.’”
Turning the discussion back to putting information about products on dealer sites, Wanderon cautioned that could cause complacency to rear its ugly head in the finance office.
“It’s easy for the F&I manager to think it’s a shortcut,” Wanderon said. “‘It’s online, so I don’t have to present it.’ The biggest reason they don’t sell products is that they don’t present them. We don’t want to let that be a crutch.”
A Captive Audience
To the likely surprise of some attendees, Wanderon raised the specter of a rarely mentioned threat to the F&I industry: captive reinsurance companies. They can be a great source of revenue for some dealers — particularly high-volume dealers — but they can lead to disaster for others.
“Dealers think that because they sell five cars a month, they should own their own company and make all the money,” Wanderon said. “Everybody wants to be someone else in this business. The problem that then comes into play is the agent or our distribution channel partners maybe aren’t educated enough to say, ‘Maybe that’s not right for you.’ Our job in the industry is to educate them on where the best option is — not where we make the most money, but where the best option is.”
“I think it’s amazing how much misinformation is out there,” Pryor added. “We still hear from dealers, ‘What do you mean it could go the other way?’ They don’t understand that they might have to write a check if the underlying products don’t perform. And good luck collecting on that if the dealer is in a cash crunch. They need to understand the economics of it and they need to understand the risk of it.”
“The dealer obviously has to be aware they’re on the hook until the tails of those contracts go away,” Saint said. “And you know some of the rewards don’t outweigh it. It has to be managed very well, but much more than that, it’s a risk that’s not for everyone.”
Part of what is fueling this trend, the panel agreed, is that dealers want more cash, and they want more of it upfront. So agents and providers are scrambling to write deals that, ultimately, aren’t a great fit for anyone.
“I’ve seen some crazy stuff, from dealer advances, from fee structures, and for the dealers who have cash-flow issues,” Wanderon said. “I saw one dealer who had $100,000 in the bank and a net worth of $22 million, and he wanted $4.5 million for 250 contracts. That’s a lot of money for 250 contracts at a $95 admin deal. Sometimes I think we hurt ourselves by competing to some of the levels that we do to get a deal, and ultimately that deal goes bad.”
Pricing the Future
Atkinson then brought up the subject of rapidly advancing in-vehicle technology and the pricing challenges it brings. “We’re pricing products that are going to have three-, five-, seven-year lifetime tails,” he said. “And we’re pricing to replace parts in that vehicle that we don’t really have a clue what it’s going to cost in three, five or seven years to repair.”
Complicating the situation, Saint added, are services such as “Vehicle Manager,” a new feature that allows OnStar users to self-initiate a diagnostic check.
“Does the claim qualify for coverage if the on-board system is telling the consumer you’re possibly going to have a problem or you have a problem?” asked Saint. “It still has to go to a technician to confirm whether it qualifies for coverage or not. That’s going to stay the same until the software gets so elaborate that there’s very [few] people who can use it.”
Adding to that uncertainty is that some systems are designed to alert drivers before a part fails — a great selling point, but one that can add both cost and frustration to an already complex situation.
“If the alternator fails, is it covered? Yes. If your OnStar says your alternator will fail within 1,000 miles, and the customer takes it to the dealership, and it’s still functioning at the dealership, is that covered?” Atkinson asked.
“We’ve seen the same thing,” Pryor said. “The frequencies are going up and that’s what’s driving it. ... Under our terms and conditions, an OnStar alert would not be covered. The customer has probably become accustomed to that.”
“Everybody keeps saying the car business is the car business. No, it’s not,” Wanderon said in response. “Look at the total losses on GAP. There are more total losses now because of all the sensors and bumpers and airbags and it puts the car over the 50% limit. So it becomes more expensive to change, and we don’t know how much it costs when you don’t price it.”
A Sharing Economy
The discussion closed with the subject of commercial use of private vehicles, specifically among drivers for ride-hailing services such as Uber and Lyft. The panel agreed that vehicles used for livery were a grade above a privately owned pickup truck a construction worker uses to drive to job sites or a sedan a Realtor uses to drive from property to property. Should those vehicles be excluded, Atkinson asked?
“I have to believe, with how those companies have expanded worldwide, that we have to have thousands of them on the books right now that we don’t even know about,” Saint pointed out. “Traditionally, we haven’t covered taxis. Ride-sharing is a little different. This customer owns their car. They have a certain amount of maintenance and upkeep they have to have to be an Uber driver. ... I don’t think we’re seeing a negative impact from it. There’s a lot of miles [on those units] and they drive out of their warranty really quickly.”
“I think it’s really a definition of what ‘commercial’ is,” said Wanderon. “Are we going to change that within our policy provisions? The challenge becomes, could you put a surcharge on it to say commercial is in there? Yeah, but you know who’s paying the surcharge? It’s the dealer, because they’re not charging them any more to buy that contract, they’re just eating up their profits. And then, ultimately, you have to deal with it when you have a claim. We need to start looking at pricing. You’re going to have a percentage of the cars that are going to have commercial utilization.”
Pryor agreed, noting he knows his company and others are covering vehicles in the “gray area” of commercial use.
“We know we’re paying claims on Uber vehicles,” Pryor said. “Every so often, you send an inspector out and you’ll get the picture back with the big Uber sticker in the window. We know those are happening. I think it does come down to the mileage and the usage.” As more U.S. vehicles enter the ride-hailing fleet, Pryor added, more drivers will rely on them as a direct source of income. “It starts to change the dynamic with the customer. We have to think about that.”
Noting that Uber is already offering new-vehicle financing options to new drivers, Wanderon said the real threat lies in the company’s foray into the F&I segment.
“I expect that they would have a service contract and a maintenance program out there at some point,” he said. “Their customer program is based on having a nice car and having it available. So that model is going to have some impact on us at some point.”