Glossary of F&I and Reinsurance Terms

How to use this glossary

These are the words dealers hear most when they talk about service contracts and owning a reinsurance company. Each definition is short and general. Exact meanings, and the rules behind them, can differ by state and by program. Where a definition draws on a specific source, it is linked.

A

• Actuary — A specialist who uses data and statistics to estimate future claims and price risk. In a dealer reinsurance program, an actuary may project how claims could develop on your contracts.
• Administrator — The company that handles the day-to-day work of a service contract program for the obligor: issuing contracts, reviewing and paying claims, and processing cancellations. Licensing rules for administrators vary by state.
• Admitted insurer — An insurance company licensed to do business in a given state. Some states require the insurer that backs service contracts to be authorized there; the California Department of Insurance guide is one example.

C

• Cancellation refund — Money returned to a customer who cancels a contract before it ends. The amount follows the contract and state law. Florida’s statute, for example, bases the minimum refund on the unearned pro rata premium, less claims paid. Other states set their own rules.
• Captive — An insurance company owned by the business, or businesses, whose risks it covers. State regulators recognize several types of captives, as described on the NAIC’s captive page. A dealer-owned reinsurance company is one kind.
• Captive manager — A firm that runs a captive’s day-to-day business: books and records, reports, filings and the compliance calendar. The Vermont Department of Financial Regulation, for example, has applicants choose an approved captive manager early in the process. Quantum Re is a captive management and consulting company.
• Cede / ceded premium — To “cede” is to pass risk to a reinsurer. Ceded premium is the money that goes with that risk.
• Ceding company — The insurer that passes risk to a reinsurer. Also called the “cedent.”
• Ceding fee — The part of the premium the insurer keeps for its role before passing the rest to the reinsurer. Programs use different names for this fee.
• Claims (paid and incurred) — Paid claims are money already paid out for covered repairs. Incurred claims are paid claims plus the estimated cost of claims that have happened but are not yet paid.
• Commutation — A negotiated settlement, usually a lump sum, that ends the reinsurer’s future obligations under a reinsurance agreement. It is one way to wind down a reinsurance company.
• Contract holder — The customer who bought the service contract.
• Contractual liability policy — An insurance policy issued to the obligor that pays covered claims if the obligor cannot. Also called a reimbursement policy. The NAIC’s Service Contracts Model Act uses the reimbursement insurance policy as a way to back a provider’s promises.

D

• Dealer cost — What the dealer sends to the program for each contract sold. It pays for administration, the insurer’s role and future claims.
• Dealer-owned reinsurance company — A separate company, owned by the dealer, that takes on the claims risk on the protection products the dealer’s own store sells.
• Domicile — The state or country where an insurance company is formed and regulated. The right domicile depends on each company’s situation.
• DORC — Trade shorthand for “dealer-owned reinsurance company.” It is a label, not a legal category.

E

• Earned premium — The part of the premium that applies to coverage already provided. See the NAIC glossary.
• Extended warranty — A common name for a vehicle service contract. The CFPB explains that it is an optional add-on and separate from the manufacturer’s warranty that comes with the vehicle.

F

• F&I (finance and insurance) — The dealership department that arranges financing and offers optional protection products such as service contracts.
• Feasibility study — A review, often with actuarial projections, of whether a captive or reinsurance company makes sense. It looks at expected claims, capital needs and what happens if results are worse than planned.
• Fronting — An arrangement where a licensed insurer issues the policy but passes the risk to a captive or reinsurer. According to IRMI, the fronting insurer charges a fee and remains responsible on the policy if the reinsurer does not pay.

I

• Investment income — Earnings on money held in reserves or in a trust account. Trust and reinsurance agreements usually limit how that money can be invested.

K

• Key replacement — An optional product that pays to replace lost, stolen or damaged keys and remotes. Whether it is treated as a service contract or as insurance varies by state.

L

• Loss ratio — Claims divided by earned premium. It shows how much of the premium went to claims.

O

• Obligor — The party legally obligated under the contract to pay for covered repairs. The California Department of Insurance uses this term in its consumer guide and notes that, in some contracts, the dealer is the obligor. Also called the provider.

P

• Penetration rate — The share of vehicles sold that include a given product. Trade publications such as Powersports Business report it as a percentage of units sold.
• Premium — The price paid for insurance coverage. In a service contract program, it is the part of the dealer cost that pays for the risk of future claims.

R

• Reinsurance — Insurance for an insurance company. One insurer passes some or all of its risk to another company, the reinsurer.
• Reinsurance agreement — The contract between the insurer and the reinsurer. It sets out which risks are passed on, the fees, reporting, how the money is secured and how the agreement can end. Sometimes called a treaty.
• Reinsurer — The company that takes on risk from an insurer. In a dealer program, that is the dealer’s own reinsurance company.
• Reserves — Money set aside to pay future claims and refunds on contracts already sold.
• Retail price — What the customer pays for the product.
• Retro (retrospective commission) — A program in which the provider keeps the risk and pays the dealer a share of the results after the fact. The dealer does not own a company or carry the risk directly.
• Runoff — The period after a reinsurer stops taking new business. It keeps paying its share of claims on existing contracts until they expire. Captive.com describes closing a captive as a planned process that must account for any remaining claims.

S

• Service contract (VSC) — An optional contract, sold separately from the vehicle, that pays for certain repairs for a set time or mileage. Often called an “extended warranty.” In New Hampshire, service contracts are regulated as “consumer guaranty contracts” under RSA 415-C.

T

• Tire and wheel protection — An optional product that pays to repair or replace tires and wheels damaged by road hazards such as potholes. How it is classified, and where it can be sold, varies by state.
• Trust account — An account held by an independent trustee that secures a reinsurer’s promises to the insurer. The NAIC’s Credit for Reinsurance Model Regulation sets out rules for these trusts, including which assets may be held.
• Trustee — The financial institution that holds a trust account and follows the trust agreement’s rules on deposits, withdrawals and investments.

U

• Underwriting profit (or loss) — Earned premium minus claims and expenses. It can be positive or negative.
• Unearned premium — Premium for coverage that has not yet been provided. See the NAIC glossary.
• Unearned premium reserve — The amount held to cover unearned premium. It shrinks as premium is earned over each contract’s life.

Key takeaways

• A dealer-owned reinsurance company sits behind an insurer, which backs the obligor, which owes the customer’s repairs.
• Premium is earned over time. Until then, it is held as a reserve, usually in a trust account.
• Loss ratio and underwriting profit or loss are the core measures of how a book of contracts is doing.
• Many terms, including how products are classified and how refunds work, depend on state law.