Target Market Series: Auto Dealerships

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Copyright © 2009 by

THE NATIONAL UNDERWRITER COMPANY

P.O. Box 14367

Cincinnati, Ohio 45250-0367

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International Standard Book Number: 978-1-938130-44-1

Library of Congress Control Number: 2008943750

Printed in the United States of America

Table of Contents

Chapter 1: Auto Dealerships

Chapter 2: SIC Classifications

Chapter 3: Market Profile For New And Used Car Dealers

Chapter 4: Market Analysis And Sample Proposal

Chapter 5: Underwriting Concerns

Chapter 6: Coverage Considerations

Chapter 7: Noninsurance Considerations

Chapter 8: Common Dealership Terms And Phrases

Chapter 9: Standard And Manuscript Endorsements

Chapter 10: Auto Dealership Coverage Checklist

Chapter 11: ISO Standard Garage Information

About the Author

Kim Smith, CPCU, ARM

AMS Services, Bothell, WA

Kim Smith began his insurance career in 1976 after graduating Summa Cum Laude from Washington State University. For the next ten years he held positions as a commercial producer, agency marketing manager, and general agency manager. He also completed his Chartered Property and Casualty Underwriter (CPCU) and Associate in Risk Management (ARM) certifications.

In 1986 he left the independent agency system to co-found Professional Software Systems, a software company that created the widely used Professional Survey, Submission and Sales System (PS4).

Mr. Smith has written several articles on insurance topics and has been a frequent guest speaker at many industry events. In addition to authoring the FC&S™ Target Market Series, Mr. Smith continues to direct the research and development for the Producer Plus product at AMS Services in Bothell Washington.

Chapter 1: Auto Dealerships

INDUSTRY BACKGROUND

Automobile dealerships can be found in just about every community in the United Sates. They are primarily engaged in the retail sale of new and used automobiles, vans, recreational vehicles, pickups, and other self-propelled land motor vehicles. According to the National Automobile Dealers Association (NADA), in 2008 there were approximately 20,100 new car and light truck dealerships operating in the United States.

Traditionally, new car dealerships have operated under a franchise arrangement with one or more auto manufacturers to sell and service their lines of vehicles within a defined territory. The evolution of the dealership system actually had its beginnings at the turn of the century when wagon and buggy makers such as Studebaker and Ford created networks of local businesses to sell their products nationwide. This allowed these manufacturers to maintain control as to how their merchandise was being sold without incurring the costs of actually running their own retail operations. Later on, when these same manufacturers switched over to producing motorized vehicles, the experience and knowledge they had gained provided the framework for the auto dealership system as we know it today.

It is important to note that the operations of franchised dealerships differ greatly from those of used car dealers. Such dealers tend to be smaller, independent businesses that maintain no manufacturing affiliations. Most operate out of small lots and do not provide the scope of repair or other services that a larger franchise dealer does.

Most dealerships are housed at either one large location where several manufacturers are represented, or at multiple sites that represent only one or two manufacturers at each location. A more recent trend has been the creation of mega dealers in which large corporations are formed to operate several different outlet sites representing dozens of different franchises. The largest of these is a publicly-held chain operation that owns over 250 separate dealership sites nationwide.

Generally, franchised dealerships are located on heavily traveled roadways or other high traffic business areas. Many have been clustering together in centralized locations to better attract a large audience of potential buyers. This allows them to operate more like the mega dealers in that they too can provide one-stop shopping for their customers.

A typical physical layout of a dealership will usually include: a main structure that contains an indoor showroom, offices, and parts department; a repair area where warranty work or other service operations are conducted; and one or more adjacent outdoor lots that are used for vehicle storage or display. Many operations may also own one or more additional buildings that may be used for various operations, such as car washing.

Normally, new car dealers purchase their stock directly from the manufacturer, although some additional units may be acquired from other dealerships. Many dealers supplement their new car inventory by obtaining additional used cars through trade-ins, consigned vehicles, auction purchases, or rental fleet resales. Note that because of quality improvements in automotive manufacturing, used vehicles have become an increasingly important source of renvenue for most franchised dealerships. According to the NADA, by 2001, used vehicles accounted for nearly 30 percent of the average dealership’s overall sales, compared to 24.5 percent in 1991. To make them acceptable to more potential buyers, some dealers have begun promoting certified pre-owned vehicles that usually includes a presell inspection and reconditioning of the car along with some type of limited performance warranty. This often raises the price of the vehicle, but in return provides customers with greater peace of mind.

Perhaps the most significant recent sales development for automotive dealers has been the increasing use of the Internet to market new and used cars and light trucks. Through websites, consumers can easily access vehicle reviews; view pictures of vehicles; and compare models, features, and prices. Many Websites also allow consumers to research insurance, financing, leasing, and warranty options.

Besides vehicles, many dealerships will also acquire other types of equipment as trade-ins. These can vary from dealer to dealer but may include watercraft, farm equipment, motorcycles or other types of recreational vehicles, and various kinds of miscellaneous heavy equipment. Most dealers wholesale these out at auction, although some may resell select items through their own used car facilities. This is especially prevalent in rural areas.

All new car dealerships provide at least some warranty and nonwarranty service work in conjunction with their parts and accessories departments. In recent years though, many dealers have found that their service departments have consistently generated greater and greater percentages of their dealership’s overall income. By the late 1990’s parts and service department profits had grown to account for almost 70 percent of a dealership’s total profits, with profit margins of 5 to 6 percent - significantly higher than the 1 to 2 percent margins realized in new vehicle sales. Consequently, many dealers now operate much more comprehensive service departments offering general auto repair, auto body work, and vehicle customization.

In addition to the above mentioned sales, service and repair activities, one or more of the following incidental operations may also be provided. Many of these will probably require some additional coverage considerations:

•  Daily rental of vehicles (not including rentals incidental to repair or service activities; those rentals are covered by most standard garage forms).

•  Long-term vehicle leasing operations.

•  Sale of extended service or warranty contracts

•  Sale of insurance products (e.g., credit life, disability, GAP, auto physical damage, etc.) in connection with the sale of an automobile.

•  Owning or sponsoring (in whole or in part) racing vehicles.

•  Participation in exhibitions, displays, parades, or other similar promotional activities.

•  Dealer operated towing or other road services.

•  In-house customer financing of new or used vehicles.

Finally, most agents will find that the sizable premiums generated by franchise dealerships make these accounts extremely attractive. It is not uncommon for these risks to generate in excess of $40,000 in annual premium per location, with many dealer principals owning and operating two or more separate business sites.

Chapter 2: SIC Classifications

The Standard Industrial Classification (SIC) manual categorizes franchised dealerships under major group heading 55 - Automotive Dealers and Gasoline Service Stations. There are actually four main sub-industry listings which are often used by insurance companies that write franchised dealerships including the primary code 5511 - New and Used Motor Vehicle Dealers, and secondary codes 5561 - Recreational Vehicle Dealers, 5571 - Motorcycle Dealers, and 5599 - Auto Dealer, NOC. Below is a brief description of each of these codes.

SUGGESTED RATING CLASSIFICATIONS

Listed below are the preferred symbols and classification codes that might be used to insure most automobile dealerships using ISO’s simplified rating plan and NCCI’s rating plan.

Chapter 3: Market Profile For New And Used Car Dealers

The following workup is done for the SIC Code 5511 – Motor Vehicle Dealers (New and Used). This is by far the largest grouping for auto dealers under the SIC system and is also generally representative of either new car dealers only or other related categories (truck, RV, etc.). These figures were provided courtesy of MarketStance (www.marketstance.com). MarketStance provides analysis tools, market statistics and analytical services on and for the U.S. insurance industry.

Chapter 4: Market Analysis And Sample Proposal

Market Analysis

When discussing potential markets for the auto dealer industry, distinctions arise as exposures vary. For example, some markets may write dealers of both new and used vehicles, while others may be open to new auto dealers only. Others may include or exclude recreational vehicles.

It is impossible to list every insurance company that offers insurance for auto dealers. However, information on specialty insurers and intermediaries that actively solicit such risks may be accessed at http://www.nationalunderwriter.com/autodealers. The list is not comprehensive, and some of the companies may cease writing auto dealer risks in the future. Inclusion in the list does not imply any endorsement by The National Underwriter Company.

Other Supplemental Materials

Additional supplemental materials are housed at http://www.nationalunderwriter.com/autodealers. Included are a sample proposal that may be used to develop an insurance program proposal for an Auto Dealer prospect, as well as interactive exposure and coverage checklists. The checklists are explained and discussed throughout this book.

Chapter 5: Underwriting Concerns

Auto dealers present a wide variety of exposures depending on the types of vehicles sold, the nature and extent of service work performed, location and condition of the premises, and any promotional or other incidental operations in which a dealer engages. The following exposures to loss are of particular concern to underwriters when evaluating this type of risk, and should be well known to the agent:

1. The profitability of most dealerships is closely related to national and local economic conditions. A sharp decrease in sales can raise concerns over possible moral hazards. Underwriters should closely review a dealer’s past and current financial statements when reviewing the submission.

2. Because of the nature of these types of risks, most dealerships will require the same fire protection considerations as any other large property accounts. Underwriters will closely review the age, construction and updating of all buildings along with the types of private and public fire protection that are available in case of loss.

3. Along with reviewing the condition of all structures, carriers will also want to ensure that proper housekeeping is maintained in appropriate work, storage and vehicle display areas. For instance, underwriters will normally review how and where new and used tires or other potentially hazardous materials are stored. They may request information as to the condition and daily cleanup procedures used in conjunction with repair pits, spraying or welding areas and if these are located away from combustible liquids or materials. Finally, they will normally like to review the condition of heating and electrical equipment to ensure that such equipment is properly maintained and in good working order.

4. Almost all dealerships act as full service operations and as such, utilize a variety of flammable or combustible substances. Solvents, paints, gasoline, oils, fiberglass parts and materials, waste paper products and oily rags are all examples of the types of flammable materials that can be found in a typical dealership. Underwriters will closely review the usage and storage procedures used in conjunction with these items to ensure that they adhere to all NFPA guidelines. Commonly, this will include requirements that all flammable and combustible liquids be kept in closed metal containers away from sources of heat, that