It’s a good time to be in the automotive industry — or any business, as long as the stock market continues to hit record highs, unemployment remains low, and consumer confidence stays strong. But auto dealers will continue to rely on F&I to maintain profitability, bring customers back for maintenance and repairs, and create opportunities for participation in reinsurance programs.
P&A interviewed 21 of the segment’s leading executives and experts to get their insights on the trends that will shape the economy as a whole and the F&I industry in particular in 2018.
Our experts agreed that the aforementioned economic indicators, coupled with the late-December passage of the Tax Cuts and Jobs Act of 2017, should put more money in American pockets and keep the country in a car-buying mood, even as new-vehicle sales plateau. The Trump administration’s next major legislative target is a massive infrastructure bill, which could create even more jobs.
“I expect a very healthy economy in 2018,” said Joel Kansanback, president of Automotive Development Group (ADG). “The recent tax changes and the potential for a future infrastructure bill should continue to fuel optimism and investment.” Kansanback does expect vehicle sales to fall, “but not a dramatic dropoff — maybe a 5% reduction in total sales and probably greater separation between the dealers — meaning the stronger dealers will grow and the weaker dealers will shrink more than 5%.”
Heading into 2018, the U.S. economy is enjoying “good momentum,” said Kristen Gruber, president of Dealers Assurance Company (DAC). “Unemployment is at a 16-year low, inflation is almost nonexistent despite years of low interest rates, and the stock market rose about 19% in the past year. These factors all contribute to a strong consumer confidence index, which bodes well for the automotive industry.”
Citing new-vehicle sales forecasts in the “still robust” 16.7 to 16.8 million-unit range, Gruber noted that trucks, SUVs and CUVs continue to attract buyers as gas prices remain low. Sales of electric vehicles may increase, she added, but their share of the market has yet to reach double digits. Autonomous vehicles could be the segment to watch in 2018.
“I think we’ll see additional manufacturer spending on self-driving technology, with some launches scheduled for as early as 2020. The big question is whether federal regulators will slow this process or help to speed things up,” she said.
“Majority opinion points to tightening car sales in 2018,” said Kumar Kathinokkula, COO of F&I Administration Solutions. “There are a few opinions pointing to a steep fall. I tend to believe they will decrease but not fall off a cliff. It will lead to increasing focus on service and F&I income to offset the even lower front-end gross income. Industry leaders taking a longer view see 2019 and 2020 sales declining further but not necessarily sharply. I am anticipating higher focus on selling more profitable products through more channels than ever before.”
“The economy is going to be great, really great,” said Dylan Doran, president of Western Fidelity Insured Services. “Tax reform is going to give our industry just the shot the U.S. auto segment is going to need. We’ve been on a racetrack for seven straight years, and the car was just about out of gas. Then tax reform is signed, and this is going to refill the tank, which is going to give us a few more good laps.”
“All economic forecasts lean forward in 2018, with favorable metrics indicated for the general U.S. economy and as those indicators apply to the auto industry and automobile dealers,” said Jim Maxim Jr. “Household incomes will be up with low unemployment, so consumer confidence will be high. Interest rates will remain low, motor fuel will remain available and cheap, and credit availability will remain good.”
Maxim, who serves as president of MaximTrak (div. RouteOne) and CDO of RouteOne Holdings LLC, also cited several “interesting tidbits” from Edmunds’ 2018 Automotive Industry Trends report, namely record returns of off-lease vehicles and aging trade-ins.
“As far as this second trend, I see it as a uniquely advantageous one for dealership F&I operations, as buyers of older models realize the value of vehicle and budget-protection products such as service agreements, prepaid maintenance and GAP,” Maxim said. “The Edmunds report also notes an increasing days-to-turn trend in 2017, the highest since the recession, which will require dealers to give even more attention to inventory management, pricing strategies and used-car reconditioning to sell cars more quickly, also reducing floorplan interest.”
Maxim also cited a Prevedere report predicting a saturated market will produce few buyers and dealers — and providers — must maximize every sales opportunity. Lee Bowron, a partner in the actuarial and insurance consulting firm of Kerper and Bowron LLC, warned that economic indicators don’t tell the whole story.
“The consensus seems to be that the economy will continue growing in 2018, but the automotive market will continue to see a decline in new-car sales,” Bowron said. “This is due to the expiration of pent-up demand for new vehicles and a large supply of late-model used cars.”
In the fourth-quarter “Economic & Market Review” he produces for BOK Financial Corp., CIO Jim Huntzinger ticked off a number of less-discussed but no less important indicators for car sales, including strong consumer spending, corporate earnings and housing prices. However, he cautioned, “Despite the clearly improved economic news, interest rates have been rangebound. That’s not to say they haven’t moved up, but the increase in rates has been modest.”
Huntzinger said a “well-behaved” interest rate market is critical to economic growth, earnings growth and full unemployment. He believes the directors of the Federal Reserve Bank understand and support this conceit.
“The Fed continued their now well-established pattern of small, ¼-point rate hikes through 2017. That pattern will continue in 2018, as the Fed has three additional rate hikes forecasted during the year,” Huntzinger wrote. “There will be a leadership change at the Federal Reserve in 2018 as Jerome Powell takes over as chairman from Janet Yellen. The overall Federal Reserve strategy will remain unchanged even though leadership will change.”
Huntzinger added that he believes individual and corporate tax cuts will help boost business activity and wage growth and “help to cushion the blow of any possible geopolitical shock, should one occur. … The U.S. economy showed improved growth beginning in the spring of 2017. The tax plan should reinforce this growth pattern in 2018.”
“In general, I see more of a flat year as rising interest rates offset the trickle down from the tax changes,” said Jeff Jacobs, CEO of Universal Lenders, home of the ZERO Plan. “I see a moderate gain in the automotive industry as the tax changes put money in the pockets of those who still need a vehicle but could not afford it prior to the tax change.”
Tax cuts could provide a “significant boost” to the economy in 2018, said Greg Petrowski, senior vice president of GPW and Associates Inc. Though their effect on new-vehicle sales remains to be seen, “The automotive industry has been trending downward the past two years, and the new tax reductions may serve to buck the trend.”
Despite that downward trend, Brian Reed believes overall sales will remain strong.
“Assuming there are not any significant events — such as war, housing meltdowns, etc. — 2018 should be another good year with used-cars sales making up for the drop in new-car sales with sales of at least 16.75 million,” said Reed, who serves as CEO of F&I Express.
“Many economists are projecting growth in the 3% to 4% area for next year. This doesn’t necessarily portend great things for the auto industry,” said Rick Roesel, director of F&I operations for Brown and Brown of Kentucky. “Fortunately for many of us, the past five to six years gave us growth and record years in our industry. Meanwhile, the economy just kind of stayed parked in the 1.5% growth area. So, just because the economy grows at a healthy clip it doesn’t mean the auto industry will too — although it sure doesn’t hurt.”
Our experts agreed that keeping up with emerging technology will be critical to success at every level of the F&I industry in 2018. Kelly Frommer, director of sales for Line 5, noted that online retailing has changed the way American consumers buy everything — except, in most cases, new vehicles.
“Consumers today know exactly what it is they want, how much it should cost, and how much they should spend. Consumers are using the internet for their research and for almost all their shopping needs,” Frommer said. “I can now buy all my groceries, clothes and technology from the comfort of my couch. No more long lines at the registers? No carrying groceries up the stairs? I’m in. The list of what I cannot buy online is now shorter than what I can buy online. The automotive dealership — and especially F&I — must keep up.”
F&I Express’ Reed concurred, noting that the appeal of online F&I is not limited to convenience.
“Consumers are demanding more transparency in process and pricing in both the car-buying and F&I process,” he said. “Dealers are at early stages of embracing the change of processes, with many dealers taking real action and making process changes in sales and F&I while other dealers talk about changing but are not taking the actual steps to really implement a change. … Then, as more dealers adjust their processes, it will force other traditional dealers to change or no longer be in the consumer’s consideration set.”
Bowron agreed that car buyers will be drawn to online purchasing options. He also noted that “Rapidly changing technology may put pressure on used-car prices as models become outdated more quickly.”
James B. ‘Jim’ Smith said the industry has started to “feel its way around” these new models, including combining online vehicle and F&I sales.
“But this will be an evolutionary as opposed to a revolutionary process,” said Smith, who serves as CEO of SouthwestRe and chairman of the board of DAC. He pointed to the growing influence of the subscription model, which appears to have been embraced by Ford and General Motors, among other automakers.
“This is a concept that targets more of an age-specific customer — think millennials — but the industry is definitely aware of this mindset for all demographics and continues to develop more programs that fit this concept,” Smith said. “Our industry needs to be aware of the technical aspects, such as payment-frequency implications, from both a regulatory and processing perspective for the subscription model.”
F&I and compliance expert Michael A. Tuno, the president of World Class Dealer Services and ARMD Resource Group, said rising vehicle prices and extending loan terms will put pressure on dealers to manage the trade cycle.
“In F&I, this troublesome trend can be solved by having products that shorten the trade cycle. The existing accelerated payment programs in the consumer finance industry will have some role in this area, but look for new products to emerge that will make this trend a more positive one for F&I and the industry as a whole.”
Tuno also pointed to leasing as a “partial solution” to the affordability gap, but he doesn’t believe the leasing option alone will grant dealers and factories the brand loyalty they desire.
“Consumers who lease will generally shop for any lease which hits their budget price point, regardless of the retailer or the manufacturer. Just as was mentioned above for the loan segment of the industry, look for new products to emerge that will aid the F&I department in this area,” he said, adding that dealers will also keep a watchful eye on credit underwriting for subprime borrowers and must keep their own houses in order as well. “F&I will be at the forefront to ensure that the relationship with the lender community remains one where trust and mutual respect will continue to be the hallmarks of the relationship. Any notion of powerbooking and altering consumer credit must be extinguished in the F&I office.”
Like most executives in the P&A segment, GPW’s Petrowski watched GAP losses rise industrywide throughout 2017 and remains concerned about the wellbeing of the core F&I offering heading into the new year.
“We’ve continued to see significant deterioration in GAP profitability and we’ll continue to monitor rate increases and the trends in the underlying drivers of GAP losses, such as total loss frequencies, depreciation rates, loan terms and credit quality,” Petrowski said.
Kathinokkula agreed but feels that GAP still presents opportunities for streamlining the administration process. “The consensus appears to be that GAP pricing will see some major structural reform – one that is perhaps long overdue. This will not only manifest itself in how GAP premiums are underwritten, but also in an increasing drive to make the administration of GAP much more efficient and cost-effective. Express Recoveries is already providing the launch pad for making cancelations easier to process, but there is tremendous opportunity to streamline the GAP claims process.”
DAC’s Gruber predicted loan terms would continue to extend as average transaction prices rise, noting that car buyers will continue to focus on their monthly payment when arranging financing.
“Negative equity increased in 2017, both in terms of the percent of trade-in vehicles with negative equity, as well as the amount, and I expect this trend to continue without a significant tightening of credit. Additional pressure on used-car pricing will result from 4 million off-lease vehicles expected in 2018.
“None of this is good news for GAP providers,” Gruber added, “and I expect to see more rate increases for this product.”
Gruber did express optimism for online F&I. She believes introducing the benefits of protection products earlier in the sales cycle could promote better understanding and higher penetration rates. But she reiterated that autonomous driving was a segment worth watching for product providers and administrators.
“Technology has the potential to shorten the car-buying cycle, driving more customers into newer models sooner as they seek the benefits of collision-prevention systems,” she said. “High-tech service contracts that cover these systems will become even more important due to the high repair costs.”
“VSCs will continue to reign supreme,” said Kathinokkula. “But certain ‘micro-trends’ are going to continue to gain momentum towards becoming major trends. Coverages that were traditionally considered ancillary are being bundled with VSC — where regulations allow and make sense — such that a single contract could serve as a ‘one-stop shop’ for customers to get more benefit. While it is likely to stay more of a blunt bundling for a majority of 2018, providers are going to get more sophisticated as more analytical and computing power is brought to bear in how the products are structured to cater to specific needs of customers.”
For used-car buyers, Maxim noted, certified pre-owned units continue to offer an attractive alternative to buying new. But he also believes demand for CPO and other used units creates a “unique opportunity” for dealers who wish to harness the power of F&I as a service retention tool.
“As dealers recognize the retention-building value in selling service contracts, prepaid maintenance and tire-and-wheel packages that tend to ‘connect’ the used-car buyer to the dealership, dealership service volume will increase, as will repair order volume and repair order dollars,” he said. “Too often, dealers have not wooed used-car buyers to keep them servicing at the dealership and establishing the service habit that translates into other car purchases down the line. As the purchase price of these high-quality, well-maintained used cars continue to rise, some consumers will find value in purchasing GAP insurance, to cover the spread between loan value and replacement cost.”
Taking a wider view, Maxim stressed the need to recognize the emerging technological “singularity” that will combine every part of the purchase and ownership experience — from shopping and buying to financing and servicing — and driven by the increasing application of artificial intelligence.
“Everything is connected, and the winners are the gatekeepers who facilitate flexible and modular processes and connect them with consumers,” said Maxim, who listed such advances as data-mining systems and predictive-analysis tools among the precursors to the AI revolution ahead. “All this is so new and moving so fast through our industry that we give no second thought anymore to the basic predictive analysis tools built into the engine onboard computers and systems sensors. The Department of Transportation has already proposed making it easier for cars on the road to talk to one another. Furthermore, at the recent Consumer Electronics Show, Nissan announced its work connecting human brains to vehicles.”
The widespread introduction of driverless vehicles will “revolutionize” the industry, Maxim said, and dealers and providers who embrace it will deliver a “full ecommerce solution” that will create an interactive F&I experience for customers, transform the vehicle delivery process, and drive dealer profitability.
Meanwhile, as ADG’s Kansanback pointed out, “While there has been a lot of conversation about F&I starting earlier in the buying process, outside of a few maverick dealers, very few have had the desire to put themselves out there. So it will be interesting to see if there is another waver ready to dive in or if adoption will continue at a pretty modest pace.”
“Where will F&I income growth come from as we max out revenue from the dealer-controlled finance transaction?” asked Universal’s Jacobs. “Service drive, cash and lease customers offer the best opportunity. These areas can no longer be ignored if you want to grow the F&I income.”
David Kaseff, a partner in the accounting firm of MarksNelson LLC, said he expects F&I products to “continue to evolve to meet the challenges posed by a changing tax and regulatory environment for product participation.” Attorney Aaron E. Lunt, head of regulatory affairs for The Warranty Group, noted that the Tax Cut and Jobs Act preserved the federal tax credit for those who purchase electronic vehicles.
Lunt expects those sales to rise, and not just because of the tax break. Automakers, regulators and industry outsiders, such as Tesla, all seem to be leaning away from the internal combustion engine, and the F&I industry will eventually have to adapt.
“Further for the F&I office, cars are still going to break down, so the need for service contracts — and other ancillary products — will remain vibrant, and the need for product innovation remains strong,” Lunt said. “Car maintenance and repairs can be expensive, so consumer appetite for products remains high.”
As for Western Fidelity’s Doran, “Manufacturers are always on my radar. Volkswagen putting a six-year, 72,000-mile comprehensive manufacturer warranty on all 2018 models catches my attention. We will be watching this closely, as potentially this could create a path for other manufacturers to follow.”
Which F&I products will be the big sellers in 2018? John Braganini, principal of Great Lakes Companies, listed appearance protection and tire-and-wheel coverage. The reason? It’s simple: “Cost and profit margin,” he said.
Doran said bundled ancillary products represent the industry’s largest growth segment. “Consumer acceptance is strong for a high-value offering of products such as paintless dent repair, windshield repair and replace, key replacement and wheel-and-tire protection, bundled together in one offering,” he said.
Frommer agreed, noting that, although service contracts “always beat other protections in sales, especially as vehicles get more complicated to repair,” bundled products represent the kind of value most car buyers understand. “The more coverage you bundle into one program, the more popular it will become with today’s consumer.”
“The growth in ancillary product sales will continue to outstrip growth in vehicle service contracts,” said Brent Griggs, president and CEO of Portfolio. “Penetration of VSCs is at an all-time high, whereas adoption of GAP, theft protection, loyalty and appearance protection products will continue to grow, and they are more affordable for car buyers.”
“Service contracts will remain strong,” reiterated The Warranty Group’s Lunt, noting that, as cars become increasingly expensive to repair, consumers will feel compelled to avoid the high cost of unexpected repairs. “Shifting that liability through service contracts is an attractive and affordable way to do so — a form of personal risk management.”
SouthwestRe’s Smith said service contracts will “obviously” remain at the top of the F&I heap in 2018, followed by GAP, “which maintains its popularity, especially given the benefits from a consumer perspective, which unfortunately has translated into underwriting pressure from a provider perspective.
“I believe that GAP will remain popular but not as popular, and aftermarket products such as protection products will fill some of the decline in GAP,” Smith added.
“Dealers looking to optimize every opportunity will ratchet up their marketing of VSC, prepaid maintenance and similar products that provide valuable services and keep customers returning to the dealership,” Maxim said. “Linking used-car buyers to the dealership for ongoing service needs is imperative — no dealer can afford to lose these customers to the aftermarket.”
Increased vehicle prices and quickening depreciation will continue to aid GAP sales, Maxim added, and he identified lease wear-and-tear as another strong product for 2018.
“Maintenance program sales increased in our arena in ’17 and will continue to gain popularity as dealers look to increase service retention,” said Brown and Brown’s Roesel. “The four-in-one or five-in-one ancillary products are continuing to gain popularity, as customers see a lot of value in those programs.”
“We see increased emphasis on embedded products — products which are purchased by the dealer and provided to all customers,” Bowron said. Tammy Siegrist, a partner with Kaseff at MarksNelson LLC, cautioned that “New statutory and regulatory disclosure rules may negatively impact dealer-obligor product offerings.” Tuno expects the 2018 F&I product mix to continue to rely on service contracts, GAP and appearance and wear-and-tear products. But that’s not to say he expects dealers to stand pat.
“Dealer participation in F&I profits within reinsurance and retrospectives will remain big selling aspects of F&I products. The clear winners for F&I products sales will be the product providers who can offer these additional profit opportunities for F&I, as well as offering upfront profits to dealers,” Tuno said. “All profit areas for F&I products that providers offer will be increasingly important to retailers as the margins for new and used vehicles is challenged to ever thinning margins. The entire process where profits are generated upfront, during the F&I sale and after the claims are paid will be important in 2018.”
In conclusion, said Randy Crisorio, the president and CEO of United Development Systems (UDS), “Automotive F&I participants must be nimble and prepare to address challenges and adapt to change in the coming year. They should expect a moving landscape in lender acceptance and in cost of credit. Nothing dramatic expected here, but there will be changes nonetheless.”
Processes and Technology
Without an F&I process, there can be no F&I sales. Without technology, the F&I process runs the risk of fading into irrelevance. So say many of our experts. But many others, including UDS’s Crisorio, say expectations must be tempered with some degree of skepticism.
“Technology advances by way of process integration and delivery systems will continue to be the hot topic in the new year,” he said. “Dealers beware of technology pronouncements that promise profit growth — well-trained people accelerate profitability, not computer monitors. Dealers beware of new technology with an expensive overload of bells and whistles that keep us from promoting fundamentals that energize our results. The human factor drives and technology aides.”
Crisorio predicted that dealers will continue to rely on “traditional F&I staffing scenarios” in 2018, and that the evolution of F&I products via expansion and adaptation will move at a moderate pace.
“F&I product evolution by providers trying to set their products apart from the masses and adaptation to an emerging retail landscape will be present but not as high-powered and visible as I expect technology to be,” Crisorio said. “Technology will be the F&I headliner for 2018.”
“The race to technology is a long and never-ending journey,” Doran said. “Of course, there will be developments. CDK and Reynolds will continue to attempt to bully themselves with threats of ‘long-term contracts or else,’ while scrappy startups will dazzle dealers with technology for discounted short-term or month-to-month deals.”
But Doran said the advancement of a fully digitized F&I process — one that does not require the customer’s presence at the dealership — will be the headline to watch for.
“Technology will play the biggest role in developing the conduit to consumer transactions outside the showroom,” he said. “These companies will also develop F&I product offerings via some kind of remote presentation. This is the technology I’m keeping my eye on.”
Bowron said that, while it may take a few years, he too foresees a greater share of the F&I process taking place online. Braganini predicted continued improvement of integration with DMS and menu providers. Lunt put the onus on product providers to “make it easier for dealerships to do business” in 2018.
“Providers that invest heavily and implement technology improvements that create a more seamless process for dealers, provide better transparency on profitability, and provide real-time performance metrics will be ahead of the curve,” Lunt said. “The more real-time data, the better, and technology will play an integral role.”
“I’ve never been what you would call a ‘techie.’ But I can tell you that the technology end of our industry is going to continue to change, and change quickly,” Roesel said. “A good amount of this pace depends on the state and county title offices. When they go paperless, it’ll be off to the races on all other aspects of the delivery.”
Kansanback concurred, predicting the trend toward an earlier, online introduction to F&I products will continue, but that is only one part of the digitization equation. “Early adopters will embrace a paperless deal jacket as well as utilizing pre-menus and menus that can be emailed. Technology is super important, but having solid processes with the right people will still carry the day.
“I also think we have to accept that the consumer isn’t going to be dazzled by an iPad or a huge computer desktop,” Kansanback added. “They are more sophisticated than we give them credit for.”
Reed said the technology that will propel F&I forward is already largely in place and available now. It’s up to dealers and dealer systems providers to embrace it and incorporate it into the product roadmap.
“What some companies call ‘digital retailing’ and what Cox Automotive calls ‘connected retail’ represents bringing together all parts of the deal to ultimately provide the ability for a dealer to do the complete deal — including desking, F&I, DMV and dealer docs — all online, regardless of where the dealer or the consumer are located,” Reed said. “That will start happening in 2018.”
Jacobs is less certain. “I don’t believe dealers have the expertise or processes to go totally paperless,” he said. “They are not ready yet to push the button and paperlessly econtract everything. They still make too many mistakes!” However, Jacobs, added, “They do need to speed the process to give F&I more time to sell.”
That is the central promise of the new technology available to dealers, Griggs said, but real results will require “significant investment” by F&I providers. “More dealers will demand instant access to their F&I performance as it continues to become more and more important to the overall financial performance of the dealership. Great F&I providers will be ready to provide this.”
Rules and Regulations
Whatever their political affiliation, anyone working in the automotive retail and finance industry had to admit some measure of optimism following the January inauguration of President Donald Trump. As the Republican candidate, Trump had promised sweeping regulatory relief if elected. He has largely lived up to that promise, even going so far as to appoint a man who once described the Consumer Financial Protection Agency as a “sad, sick joke” as the agency’s new director.
Lunt said he predicts a “relaxing” of regulations at the federal level but not any significant changes. In addition to the leadership change at the CFPB, the Trump administration has “decelerated and deemphasized” the push toward further
regulation. However, he noted, “Automotive dealerships remain primarily regulated by the Federal Trade Commission, and it is a very capable and active regulator.”
Lunt further noted that service contract providers are primarily regulated at the state level by insurance departments and other state agencies. State attorneys general, consumer advocates and plaintiff’s attorneys will remain vigilant, and so should dealers and providers.
“Regulatory scrutiny will continue to present, and the retail industry will continue to strive for greater transparency and professionalism,” Crisorio said. “Training will continue to be a focal point — doing things the right way despite what appears to be a diminishing influence of the CFPB and its unqualified practices of the past.”
“Because of the leadership change in the CFPB and the concomitant lessening of regulatory pressure on the lending and automotive industry, the landscape should be greener,” Smith said. “However, there are still many levels of pressure, such as the recent complaint filed by the state attorney general in New York for abusive aftermarket sales tactics.
“Bottom line, even though there is a lessening in certain regulatory arenas, the F&I and dealer community still needs to be cognizant of the rules and regulations in the marketplace,” Smith warned.
Tuno agreed, noting that, although there may be relief ahead, “The sheer volume of regulations that have emerged over the past 20-plus years has made this part of running the business extremely difficult.”
Like Smith, Tuno pointed to the “mini-CFPBs” that have sprouted up at the state level — including in his home state of Pennsylvania — in the wake of Trump’s election.
“This means that the retailer, product providers and distribution channels are all at risk due to the direct control the attorneys general have over these areas, especially if compliance isn’t a part of the culture or curriculum. The industry needs to be in better control of this risk and be in a better position to chart a safe course through this often-difficult area.”
Siegrist noted that some significant changes relating to reinsurance programs have already taken place. With tax reform came a “dramatically” changed landscape of dealer participation options.
“For example, given the new rules, dealers investing in non-controlled foreign entities must now evaluate the viability of these structures,” Siegrist explained. “The passive foreign investment company rules may significantly impact the taxation of these structures. Also, the new legislation reduces both corporate and pass-through tax rates which impacts the analysis of the appropriate dealer participation program that may best suit a particular situation. We have also seen increased interest in dealer-owned warranty companies.”
Dealers who operate their own reinsurance companies must also consider new diversification rules under IRC § 831(b) when operating their own reinsurance company, and additional disclosure requirements also exist under the new IRC § 831(b) requirements, Siegrist added.
“The IRS has yet to release guidance on these new disclosures. The industry is also waiting for guidance related to the new diversification rules. This lack of guidance presents its own challenges for dealers and their tax advisors,” she said.
Petrowski concurred, noting that, “In order for some of these programs to remain viable, they may be required to modify their structures to comply with these new requirements.”
The Subscription Economy
F&I owes much of its success to the concept of commitment: Car buyers commit to a vehicle, auto finance sources commit to the loan, and F&I providers commit to protecting the investment. As the subscription model catches on, Tuno said, the P&A segment will feel the difference — and could benefit.
“I see a great deal of impact of the subscription economy on the way consumers buy F&I products,” Tuno said, pointing to the success of companies like Amazon, Netflix and Spotify. “The subscription economy offers a tremendous upside to the industry, because it breaks the transactional revenue stream and provides for an annuity flow of cash stream for F&I products.”
Roesel expressed little fear of the shift toward a subscription model, believing that product providers will continue to innovate along with the market.
“This is a very resilient industry; we’ve always found ways to make money in most circumstances. This is no different,” he said. “Our processes will adapt as the framework of selling a vehicle changes. I’m certain there will be opportunities and products ahead that we don’t even see coming yet.”
“Today’s consumers are embracing the subscription model, and these consumers are primed to embrace F&I products,” Frommer said. “F&I products have always taken care of most of the consumer’s vehicle needs, similar to a subscription service. For the F&I department to capture the subscription-type consumer, they must bundle as many of their coverages into one product and offer the F&I products as a subscription-type service.”
“The industry seems to be addicted to single-premium products which are financed,” Bowron said. “The customer’s preference would probably be to have some of these products outside the loan. There seems to be a lack of suitable products for customers that aren’t financing, so development of these products will expand.”
Lunt described the subscription economy as a “structural shift” toward a more encompassing relationship with each customer. But F&I products require a high degree of specific underwriting performance, and that creates a unique obstacle for providers and administrators.
“The F&I industry, and the broader insurance marketplace, is built on pooling risks, but individually pricing each unique risk,” Lunt explained. “Unless providers can identify a way to accurately price subscription products, and have confidence in loss potentials to set adequate reserves, this could be a perplexing problem.”
Asked to offer further predictions for 2018, Griggs said he expects mergers and acquisitions activity among dealerships to build upon the momentum it has gained in recent years.
“I believe auto dealer consolidation will accelerate in 2018 as more profitable dealers gobble up weak operators and economies of scale become ever more important,” he said. “Major auto consolidators will finally reap the rewards of their past and present acquisition strategies — provided they have not overpaid for their acquired stores.”
Braganini predicted higher losses and pricing for GAP. Gruber said a growing cohort of high-mileage, rapid-depreciation Uber and Lyft drivers will negatively impact underwriting results for GAP and service contracts. Jacobs expects delinquencies and default losses to rise as a result of lenient credit purchasing and extended monthly terms. “It’s a cycle of greed and it is due to reappear!” he warned.
Smith predicted that 2018 will be marked by two characteristics: First, dealers will look for new ways to distinguish themselves from the competition, which could spur greater interest in loyalty programs and associated products. Second, investing in training and development will continue to pay dividends for dealers and F&I personnel.
“But distinguishing yourself from your competitors not only applies to the dealers; everyone operating in our industry needs to adopt the same principles,” Smith said.
Kathinokkula sees the future on a much larger scale. “Most people are well aware of the explosive growth in capabilities of artificial intelligence and big data. These are synergistic trends that are making systems more and more capable of predicting what will happen rather than explaining, via reports and dashboards, what has already happened. Artificial intelligence needs big data to act as a sample set to ‘learn’ from. And then the lessons learnt are applied to influence future transactions.”
Kathinokkula predicted that large organizations with “foresight, large data sets, and good budgets” will invest significantly in these emergent technologies. They will use them to calculate which coverages to offer to whom and at what price point to ensure maximum profitability and likelihood of sale.
“Toward the end of 2018, we are going to see reports of the first major inroads of such insights into menus and other selling platforms,” Kathinokkula said. “Furthermore, the first generation of such systems will streamline VSC and other mechanical claims to ensure more efficient claims processing.”
“For agents, the time is now. We have a great opportunity to help in a sales climate that will have dealers looking for help more than ever,” Kansanback said. “Even a slight downturn will produce some panic among some dealers, and that provides opportunity for the best agents to step in and do their thing — the manufacturers and big box providers are not equipped to help.”
Griggs said there is no reason for F&I providers to panic about the near future, even as they keep a close eye on the trends that will shape their success.
“Successful F&I providers that focus on creating wealth for their dealer clients through income development and great service will continue to fare well,” he said. “We offer consumer-friendly, value-added products that also happen to be a major driver of dealer profitability. What’s not to like about that position?”