Maximize Dealership Profits with a Retrospective Commission Program

What is Retrospective Commission in Dealerships?

A Retrospective Commission Dealer Program allows you to participate in the underwriting profit of contracts sold in your dealership(s) as well as investment income. This can lead to significant profits over time. The yearly commission payment you receive will be based on earned reserves less incurred claims, loss adjustment expenses, and a participation fee, plus investment income. Volume and vesting requirements may affect annual payouts.

With that in mind it's easy to see that you could get a sizable amount from this program, but you could also get less than you expect if there's an unusually large number of incurred claims. Since investment income is added to your commission payment, this could also affect what you receive.

If your dealership is interested in building future wealth for the long-term this can be a good choice. Depending on the results of your Retrospective Commission calculation, an annual commission check begins after two full calendar years of writing. Still, this structure can be very rewarding under the right circumstances.

Advantages of Retrospective Commission Structures

There are several advantages to this type of program, especially when you're looking for virtually risk-free profit participation for the long term.

Limited risk to the dealer

In a Retrospective Commission program, you have the potential to receive a check every year representing the dealer profit from the program (depending upon the results of the Retrospective Commission calculation). This is a turn-key program with no upfront costs required from the dealer. With no ongoing upkeep or general expenses associated with the structure, you can invest your efforts in other areas of your dealership. It's lower-risk because if the overall portfolio goes negative, you are not responsible for the losses. Annual commission checks resume once the annual calculation turns positive.

While it's possible to make more money with other types of participation programs, you'll also be taking on more risk and expense. If you're a new dealership or haven't been in business too long, you might not want to take the chance of major operational impacts in your first few years. Many more established dealerships will want to avoid significant risks in part due to the predictability of annual payments in a program that is performing well with significant underwriting profits.

Inclusion of investment income

Including investment income in the annual check is a great perk when you choose this type of program. Once you receive your earned retrospective commission check, if invested wisely, the investment income component of your yearly commission could be a significant amount.

Investment income opportunities grow as additional contracts are written over time. While not as advantageous as a Guaranteed Retro or 1+ program as it relates to current cash flow, it is important to note they do not come with an investment income component like a Retrospective Commission program does.

Considerations and Challenges

It's important to recognize the disadvantages to this kind of dealer program to ensure that it's right for you.

Limited potential for higher returns

Due to limited exposure to higher risk sectors of the market with a Retrospective Commission Dealer Program, the returns may be lower than that seen in some Reinsurance programs. If you are risk averse when it comes to investing, the Retrospective Commission program may be a great fit. It's important to understand that your return potential is going to be defined in some ways. There is also some uncertainty in commission payments due to external factors such as inflation and financial market performance.

Dependence on underwriting performance

The structure heavily relies on underwriting performance. If loss experience changes over time, the amount you make from the program is going to be impacted. When you find a program you want to be part of, make sure you understand the underwriting guidelines and how the process works.

Possible lower after-tax returns

The tax implications of retro programs are important, because they may provide you with lower after-tax returns when compared to a Reinsurance program. Balancing this issue and determining the level of risk you want to undertake should be aligned with your business goals.

Best Use Case for Implementing Retrospective Commission

This program is ideal for a risk-averse dealer that would like to build longer term wealth (with investment income) and enjoys the steadiness of a potential yearly check with no upkeep costs and/or general expenses associated with the program.

Is a Retro Dealer Program Right for You?

For leaders that don’t need immediate cash flow at their dealership and want to create long-term wealth-building strategies, a Retrospective Commission Dealer Program can be a great choice. If you're aiming for steady profits and a stable income base from the contracts you sell, this can be a great way to achieve dealer goals and feel confident about the future.