After a strong finish to 2024, and an initial positive outlook for 2025, uncertainty has emerged in the auto industry. The tariff landscape, customer issues with claiming EV credits, and a generally slow start have dampened the optimistic forecast. Fixed Ops and expense control were the mantras of 2024 and will continue to be important as front-end grosses shrink and interest costs rise. But there is a bright spot on the variable side. Strong finance and insurance (F&I) departments contribute to a dealership’s profitability. Risk mitigation is also an area that continues to draw scrutiny from regulators.
Unlocking Profit Potential
Available data from public and local dealers tells us that F&I income remains a stable source of gross profit for dealerships. While front-end margins have slid back towards pre-pandemic levels, F&I remains consistent with 2022 peaks. This will be increasingly important as affordability and pricing have become major headwinds, and with inventories still bloated, price competition is sure to pick up. This doesn’t mean you should give away a vehicle to get money on the back end, but it does highlight the importance of having sound processes and a well-trained team in place. Those that can sell value-added products (finance reserves don’t count) will have a clear edge in gross profit.
Leveraging F&I for Cash Flow & Growth
In addition to gross, F&I also provides a unique opportunity through dealer reinsurance programs. Several options are available, and each store’s needs vary, but the greatest advantages are generally realized when a dealer shares in the underwriting profit on the products they’re selling. These reinsurance companies provide an off-balance sheet asset and potential source of liquidity as they earn out, allowing dealers to take distributions, use them as collateral, or borrow directly. Capital requirements tightened in 2024, making it more challenging to obtain financing for a deal or new facility, but tapping into your reinsurance company can help you operate with greater flexibility than with a traditional lender.
As good as the programs can be, reinsurance isn’t a set it and forget it affair. In managing and monitoring performance, dealers need to stay in touch with their F&I providers to make sure products are ceded correctly. To quickly build premium, you want high volume on products that earn out quickly, which spreads out the risk and shortens the lag between cash going into the company and becoming available to the dealer. Rising repair costs make it more expensive to fix a vehicle, and to the extent your reinsurance company is footing the bill, that will drive up your loss ratio unless the products and premium going into the reinsurance company are managed.
Protecting Your Dealership from Costly Pitfalls
Managing and monitoring F&I helps maximize sales and protect your dealership. Poor F&I practices led to large claims brought against dealers in 2024, including a $20 million settlement in Illinois and smaller, but significant, cases in New York and Rhode Island. Many of these cases involve alleged deal packing or other practices that were deemed deceptive to consumers. Establishing policies and processes, along with deal jacket reviews and other monitoring initiatives, helps minimize your exposure to unnecessary risk.
Also note, although the FTC’s Vehicle Shopping Rule was vacated by the Fifth Circuit Court of Appeals in January, many of the same provisions still apply and continue to be subject to FTC enforcement. Further, while the current administration is generally seen as pro-business and anti-regulation, this doesn’t stop states from moving forward with their own actions against players they deem as running afoul of the rules. During President Trump’s first term, there was concerted action by various state Attorneys General to fill any perceived void left by Federal deregulation, and many appear ready to do so again. This isn’t to say dealers are generally doing anything deceptive, but documenting compliance is an effective way to avoid frivolous complaints that become financial and reputational headaches.
The Road Ahead
Procedural compliance isn’t the most exciting part of dealership operations, but in the case of the F&I department, it’s imperative to optimizing profits and mitigating risks. The additional benefit of growing a dealer’s reinsurance reserves provides the flexibility and capacity needed to adapt in the face of uncertainty. Those that can put sound processes and well-trained teams in place will be poised to leverage opportunity for the greatest success. Dealers should consult with their F&I providers and other advisors to make sure their F&I programs are properly aligned with their goals.
Matthew Marcoullier is a director at ARB. He focuses primarily on financial accounting and consulting services for auto dealerships, commercial businesses, and closely-held businesses. Matt previously served as a Senior Auditor for the State of Maine Department of Audit.
