Keep GAP Out of Your Reinsurance Company
For dealers building a reinsurance strategy, service contracts are one of the best profit generators in the business. The markup is strong, and in a well-run program, the underwriting profit comes back to the dealer instead of staying with the carrier.
GAP is different. It's one of the products you usually want to keep out.
One claim can do real damage
A service contract claim might run a few thousand dollars. A single GAP claim can run thirty thousand. Now picture a reinsurance company that wrote a modest volume of GAP and caught two or three of those in a year. The loss ratio blows up, and the profit from everything else in the program goes to pay for it. A year of good service contract business, gone, because of three wrecks you had no control over.
That's the predictable result of putting a high-severity product in a small book.
Sell it, don't reinsure it
This isn't an argument against selling GAP. Customers who need it really need it, and GAP is one of the highest-penetration products in any finance office because customers already understand it. The point is where the risk sits. Sell GAP for the customer's protection and the store's income. Keep the claim risk out of your own reinsurance company.
Decide what goes in on purpose
Every product has its own claim pattern. Some pay back steadily and belong in a reinsurance program. Others carry large, unpredictable claims that can wipe out a year of profit in one hit. Deciding which is which is one of the most important choices a dealer makes when setting up reinsurance, and too many dealers make it by default instead of on purpose. The agent sets it up, the dealer signs, and nobody asks which products are actually in the company until a bad year shows up in the statement.
That's part of what we help dealers work through: not just selling more, but building a program that keeps the profit once it's made.
Know your lenders' limits
One practical note. Lenders cap what you can charge for GAP. Some allow around $1,500, others closer to $1,000. Know each lender's limit before you build the menu, not after a deal gets kicked back.