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Industry Trends for 2018

Industry Trends for 2018

It’s a good time to be in the automotive industry — or any business, as long as the stock market continues to hit record highs, unemployment remains low, and consumer confidence stays strong. But auto dealers will continue to rely on F&I to maintain profitability, bring customers back for maintenance and repairs, and create opportunities for participation in reinsurance programs.

P&A interviewed 21 of the segment’s leading executives and experts to get their insights on the trends that will shape the economy as a whole and the F&I industry in particular in 2018.

The Economy

Our experts agreed that the aforementioned economic indicators, coupled with the late-December passage of the Tax Cuts and Jobs Act of 2017, should put more money in American pockets and keep the country in a car-buying mood, even as new-vehicle sales plateau. The Trump administration’s next major legislative target is a massive infrastructure bill, which could create even more jobs.

“I expect a very healthy economy in 2018,” said Joel Kansanback, president of Automotive Development Group (ADG). “The recent tax changes and the potential for a future infrastructure bill should continue to fuel optimism and investment.” Kansanback does expect vehicle sales to fall, “but not a dramatic dropoff — maybe a 5% reduction in total sales and probably greater separation between the dealers — meaning the stronger dealers will grow and the weaker dealers will shrink more than 5%.”

Heading into 2018, the U.S. economy is enjoying “good momentum,” said Kristen Gruber, president of Dealers Assurance Company (DAC). “Unemployment is at a 16-year low, inflation is almost nonexistent despite years of low interest rates, and the stock market rose about 19% in the past year. These factors all contribute to a strong consumer confidence index, which bodes well for the automotive industry.”

Citing new-vehicle sales forecasts in the “still robust” 16.7 to 16.8 million-unit range, Gruber noted that trucks, SUVs and CUVs continue to attract buyers as gas prices remain low. Sales of electric vehicles may increase, she added, but their share of the market has yet to reach double digits. Autonomous vehicles could be the segment to watch in 2018.

“I think we’ll see additional manufacturer spending on self-driving technology, with some launches scheduled for as early as 2020. The big question is whether federal regulators will slow this process or help to speed things up,” she said.

“Majority opinion points to tightening car sales in 2018,” said Kumar Kathinokkula, COO of F&I Administration Solutions. “There are a few opinions pointing to a steep fall. I tend to believe they will decrease but not fall off a cliff. It will lead to increasing focus on service and F&I income to offset the even lower front-end gross income. Industry leaders taking a longer view see 2019 and 2020 sales declining further but not necessarily sharply. I am anticipating higher focus on selling more profitable products through more channels than ever before.”

“The economy is going to be great, really great,” said Dylan Doran, president of Western Fidelity Insured Services. “Tax reform is going to give our industry just the shot the U.S. auto segment is going to need. We’ve been on a racetrack for seven straight years, and the car was just about out of gas. Then tax reform is signed, and this is going to refill the tank, which is going to give us a few more good laps.”

“All economic forecasts lean forward in 2018, with favorable metrics indicated for the general U.S. economy and as those indicators apply to the auto industry and automobile dealers,” said Jim Maxim Jr. “Household incomes will be up with low unemployment, so consumer confidence will be high. Interest rates will remain low, motor fuel will remain available and cheap, and credit availability will remain good.”

Maxim, who serves as president of MaximTrak (div. RouteOne) and CDO of RouteOne Holdings LLC, also cited several “interesting tidbits” from Edmunds’ 2018 Automotive Industry Trends report, namely record returns of off-lease vehicles and aging trade-ins.

“As far as this second trend, I see it as a uniquely advantageous one for dealership F&I operations, as buyers of older models realize the value of vehicle and budget-protection products such as service agreements, prepaid maintenance and GAP,” Maxim said. “The Edmunds report also notes an increasing days-to-turn trend in 2017, the highest since the recession, which will require dealers to give even more attention to inventory management, pricing strategies and used-car reconditioning to sell cars more quickly, also reducing floorplan interest.”

Maxim also cited a Prevedere report predicting a saturated market will produce few buyers and dealers — and providers — must maximize every sales opportunity. Lee Bowron, a partner in the actuarial and insurance consulting firm of Kerper and Bowron LLC, warned that economic indicators don’t tell the whole story.

“The consensus seems to be that the economy will continue growing in 2018, but the automotive market will continue to see a decline in new-car sales,” Bowron said. “This is due to the expiration of pent-up demand for new vehicles and a large supply of late-model used cars.”

In the fourth-quarter “Economic & Market Review” he produces for BOK Financial Corp., CIO Jim Huntzinger ticked off a number of less-discussed but no less important indicators for car sales, including strong consumer spending, corporate earnings and housing prices. However, he cautioned, “Despite the clearly improved economic news, interest rates have been rangebound. That’s not to say they haven’t moved up, but the increase in rates has been modest.”

Huntzinger said a “well-behaved” interest rate market is critical to economic growth, earnings growth and full unemployment. He believes the directors of the Federal Reserve Bank understand and support this conceit.

“The Fed continued their now well-established pattern of small, ¼-point rate hikes through 2017. That pattern will continue in 2018, as the Fed has three additional rate hikes forecasted during the year,” Huntzinger wrote. “There will be a leadership change at the Federal Reserve in 2018 as Jerome Powell takes over as chairman from Janet Yellen. The overall Federal Reserve strategy will remain unchanged even though leadership will change.”

Huntzinger added that he believes individual and corporate tax cuts will help boost business activity and wage growth and “help to cushion the blow of any possible geopolitical shock, should one occur. … The U.S. economy showed improved growth beginning in the spring of 2017. The tax plan should reinforce this growth pattern in 2018.”

“In general, I see more of a flat year as rising interest rates offset the trickle down from the tax changes,” said Jeff Jacobs, CEO of Universal Lenders, home of the ZERO Plan. “I see a moderate gain in the automotive industry as the tax changes put money in the pockets of those who still need a vehicle but could not afford it prior to the tax change.”

Tax cuts could provide a “significant boost” to the economy in 2018, said Greg Petrowski, senior vice president of GPW and Associates Inc. Though their effect on new-vehicle sales remains to be seen, “The automotive industry has been trending downward the past two years, and the new tax reductions may serve to buck the trend.”

Despite that downward trend, Brian Reed believes overall sales will remain strong.

“Assuming there are not any significant events — such as war, housing meltdowns, etc. — 2018 should be another good year with used-cars sales making up for the drop in new-car sales with sales of at least 16.75 million,” said Reed, who serves as CEO of F&I Express.

“Many economists are projecting growth in the 3% to 4% area for next year. This doesn’t necessarily portend great things for the auto industry,” said Rick Roesel, director of F&I operations for Brown and Brown of Kentucky. “Fortunately for many of us, the past five to six years gave us growth and record years in our industry. Meanwhile, the economy just kind of stayed parked in the 1.5% growth area. So, just because the economy grows at a healthy clip it doesn’t mean the auto industry will too — although it sure doesn’t hurt.”

The Industry

Our experts agreed that keeping up with emerging technology will be critical to success at every level of the F&I industry in 2018. Kelly Frommer, director of sales for Line 5, noted that online retailing has changed the way American consumers buy everything — except, in most cases, new vehicles.

“Consumers today know exactly what it is they want, how much it should cost, and how much they should spend. Consumers are using the internet for their research and for almost all their shopping needs,” Frommer said. “I can now buy all my groceries, clothes and technology from the comfort of my couch. No more long lines at the registers? No carrying groceries up the stairs? I’m in. The list of what I cannot buy online is now shorter than what I can buy online. The automotive dealership — and especially F&I — must keep up.”

F&I Express’ Reed concurred, noting that the appeal of online F&I is not limited to convenience.

“Consumers are demanding more transparency in process and pricing in both the car-buying and F&I process,” he said. “Dealers are at early stages of embracing the change of processes, with many dealers taking real action and making process changes in sales and F&I while other dealers talk about changing but are not taking the actual steps to really implement a change. … Then, as more dealers adjust their processes, it will force other traditional dealers to change or no longer be in the consumer’s consideration set.”

Bowron agreed that car buyers will be drawn to online purchasing options. He also noted that “Rapidly changing technology may put pressure on used-car prices as models become outdated more quickly.”

James B. ‘Jim’ Smith said the industry has started to “feel its way around” these new models, including combining online vehicle and F&I sales.

“But this will be an evolutionary as opposed to a revolutionary process,” said Smith, who serves as CEO of SouthwestRe and chairman of the board of DAC. He pointed to the growing influence of the subscription model, which appears to have been embraced by Ford and General Motors, among other automakers.

“This is a concept that targets more of an age-specific customer — think millennials — but the industry is definitely aware of this mindset for all demographics and continues to develop more programs that fit this concept,” Smith said. “Our industry needs to be aware of the technical aspects, such as payment-frequency implications, from both a regulatory and processing perspective for the subscription model.”

F&I and compliance expert Michael A. Tuno, the president of World Class Dealer Services and ARMD Resource Group, said rising vehicle prices and extending loan terms will put pressure on dealers to manage the trade cycle.

“In F&I, this troublesome trend can be solved by having products that shorten the trade cycle. The existing accelerated payment programs in the consumer finance industry will have some role in this area, but look for new products to emerge that will make this trend a more positive one for F&I and the industry as a whole.”

Tuno also pointed to leasing as a “partial solution” to the affordability gap, but he doesn’t believe the leasing option alone will grant dealers and factories the brand loyalty they desire.

“Consumers who lease will generally shop for any lease which hits their budget price point, regardless of the retailer or the manufacturer. Just as was mentioned above for the loan segment of the industry, look for new products to emerge that will aid the F&I department in this area,” he said, adding that dealers will also keep a watchful eye on credit underwriting for subprime borrowers and must keep their own houses in order as well. “F&I will be at the forefront to ensure that the relationship with the lender community remains one where trust and mutual respect will continue to be the hallmarks of the relationship. Any notion of powerbooking and altering consumer credit must be extinguished in the F&I office.”

Like most executives in the P&A segment, GPW’s Petrowski watched GAP losses rise industrywide throughout 2017 and remains concerned about the wellbeing of the core F&I offering heading into the new year.

“We’ve continued to see significant deterioration in GAP profitability and we’ll continue to monitor rate increases and the trends in the underlying drivers of GAP losses, such as total loss frequencies, depreciation rates, loan terms and credit quality,” Petrowski said.

Kathinokkula agreed but feels that GAP still presents opportunities for streamlining the administration process. “The consensus appears to be that GAP pricing will see some major structural reform – one that is perhaps long overdue. This will not only manifest itself in how GAP premiums are underwritten, but also in an increasing drive to make the administration of GAP much more efficient and cost-effective. Express Recoveries is already providing the launch pad for making cancelations easier to process, but there is tremendous opportunity to streamline the GAP claims process.”

DAC’s Gruber predicted loan terms would continue to extend as average transaction prices rise, noting that car buyers will continue to focus on their monthly payment when arranging financing.

“Negative equity increased in 2017, both in terms of the percent of trade-in vehicles with negative equity, as well as the amount, and I expect this trend to continue without a significant tightening of credit. Additional pressure on used-car pricing will result from 4 million off-lease vehicles expected in 2018.

“None of this is good news for GAP providers,” Gruber added, “and I expect to see more rate increases for this product.”

Gruber did express optimism for online F&I. She believes introducing the benefits of protection products earlier in the sales cycle could promote better understanding and higher penetration rates. But she reiterated that autonomous driving was a segment worth watching for product providers and administrators.

“Technology has the potential to shorten the car-buying cycle, driving more customers into newer models sooner as they seek the benefits of collision-prevention systems,” she said. “High-tech service contracts that cover these systems will become even more important due to the high repair costs.”

“VSCs will continue to reign supreme,” said Kathinokkula. “But certain ‘micro-trends’ are going to continue to gain momentum towards becoming major trends. Coverages that were traditionally considered ancillary are being bundled with VSC — where regulations allow and make sense — such that a single contract could serve as a ‘one-stop shop’ for customers to get more benefit. While it is likely to stay more of a blunt bundling for a majority of 2018, providers are going to get more sophisticated as more analytical and computing power is brought to bear in how the products are structured to cater to specific needs of customers.”

For used-car buyers, Maxim noted, certified pre-owned units continue to offer an attractive alternative to buying new. But he also believes demand for CPO and other used units creates a “unique opportunity” for dealers who wish to harness the power of F&I as a service retention tool.

“As dealers recognize the retention-building value in selling service contracts, prepaid maintenance and tire-and-wheel packages that tend to ‘connect’ the used-car buyer to the dealership, dealership service volume will increase, as will repair order volume and repair order dollars,” he said. “Too often, dealers have not wooed used-car buyers to keep them servicing at the dealership and establishing the service habit that translates into other car purchases down the line. As the purchase price of these high-quality, well-maintained used cars continue to rise, some consumers will find value in purchasing GAP insurance, to cover the spread between loan value and replacement cost.”

Taking a wider view, Maxim stressed the need to recognize the emerging technological “singularity” that will combine every part of the purchase and ownership experience — from shopping and buying to financing and servicing — and driven by the increasing application of artificial intelligence.

“Everything is connected, and the winners are the gatekeepers who facilitate flexible and modular processes and connect them with consumers,” said Maxim, who listed such advances as data-mining systems and predictive-analysis tools among the precursors to the AI revolution ahead. “All this is so new and moving so fast through our industry that we give no second thought anymore to the basic predictive analysis tools built into the engine onboard computers and systems sensors. The Department of Transportation has already proposed making it easier for cars on the road to talk to one another. Furthermore, at the recent Consumer Electronics Show, Nissan announced its work connecting human brains to vehicles.”

The widespread introduction of driverless vehicles will “revolutionize” the industry, Maxim said, and dealers and providers who embrace it will deliver a “full ecommerce solution” that will create an interactive F&I experience for customers, transform the vehicle delivery process, and drive dealer profitability.

Meanwhile, as ADG’s Kansanback pointed out, “While there has been a lot of conversation about F&I starting earlier in the buying process, outside of a few maverick dealers, very few have had the desire to put themselves out there. So it will be interesting to see if there is another waver ready to dive in or if adoption will continue at a pretty modest pace.”

“Where will F&I income growth come from as we max out revenue from the dealer-controlled finance transaction?” asked Universal’s Jacobs. “Service drive, cash and lease customers offer the best opportunity. These areas can no longer be ignored if you want to grow the F&I income.”

David Kaseff, a partner in the accounting firm of MarksNelson LLC, said he expects F&I products to “continue to evolve to meet the challenges posed by a changing tax and regulatory environment for product participation.” Attorney Aaron E. Lunt, head of regulatory affairs for The Warranty Group, noted that the Tax Cut and Jobs Act preserved the federal tax credit for those who purchase electronic vehicles.

Lunt expects those sales to rise, and not just because of the tax break. Automakers, regulators and industry outsiders, such as Tesla, all seem to be leaning away from the internal combustion engine, and the F&I industry will eventually have to adapt.

“Further for the F&I office, cars are still going to break down, so the need for service contracts — and other ancillary products — will remain vibrant, and the need for product innovation remains strong,” Lunt said. “Car maintenance and repairs can be expensive, so consumer appetite for products remains high.”

As for Western Fidelity’s Doran, “Manufacturers are always on my radar. Volkswagen putting a six-year, 72,000-mile comprehensive manufacturer warranty on all 2018 models catches my attention. We will be watching this closely, as potentially this could create a path for other manufacturers to follow.”

F&I Products

Which F&I products will be the big sellers in 2018? John Braganini, principal of Great Lakes Companies, listed appearance protection and tire-and-wheel coverage. The reason? It’s simple: “Cost and profit margin,” he said.

Doran said bundled ancillary products represent the industry’s largest growth segment. “Consumer acceptance is strong for a high-value offering of products such as paintless dent repair, windshield repair and replace, key replacement and wheel-and-tire protection, bundled together in one offering,” he said.

Frommer agreed, noting that, although service contracts “always beat other protections in sales, especially as vehicles get more complicated to repair,” bundled products represent the kind of value most car buyers understand. “The more coverage you bundle into one program, the more popular it will become with today’s consumer.”

“The growth in ancillary product sales will continue to outstrip growth in vehicle service contracts,” said Brent Griggs, president and CEO of Portfolio. “Penetration of VSCs is at an all-time high, whereas adoption of GAP, theft protection, loyalty and appearance protection products will continue to grow, and they are more affordable for car buyers.”

“Service contracts will remain strong,” reiterated The Warranty Group’s Lunt, noting that, as cars become increasingly expensive to repair, consumers will feel compelled to avoid the high cost of unexpected repairs. “Shifting that liability through service contracts is an attractive and affordable way to do so — a form of personal risk management.”

SouthwestRe’s Smith said service contracts will “obviously” remain at the top of the F&I heap in 2018, followed by GAP, “which maintains its popularity, especially given the benefits from a consumer perspective, which unfortunately has translated into underwriting pressure from a provider perspective.

“I believe that GAP will remain popular but not as popular, and aftermarket products such as protection products will fill some of the decline in GAP,” Smith added.

“Dealers looking to optimize every opportunity will ratchet up their marketing of VSC, prepaid maintenance and similar products that provide valuable services and keep customers returning to the dealership,” Maxim said. “Linking used-car buyers to the dealership for ongoing service needs is imperative — no dealer can afford to lose these customers to the aftermarket.”

Increased vehicle prices and quickening depreciation will continue to aid GAP sales, Maxim added, and he identified lease wear-and-tear as another strong product for 2018.

“Maintenance program sales increased in our arena in ’17 and will continue to gain popularity as dealers look to increase service retention,” said Brown and Brown’s Roesel. “The four-in-one or five-in-one ancillary products are continuing to gain popularity, as customers see a lot of value in those programs.”

“We see increased emphasis on embedded products — products which are purchased by the dealer and provided to all customers,” Bowron said. Tammy Siegrist, a partner with Kaseff at MarksNelson LLC, cautioned that “New statutory and regulatory disclosure rules may negatively impact dealer-obligor product offerings.” Tuno expects the 2018 F&I product mix to continue to rely on service contracts, GAP and appearance and wear-and-tear products. But that’s not to say he expects dealers to stand pat.

“Dealer participation in F&I profits within reinsurance and retrospectives will remain big selling aspects of F&I products. The clear winners for F&I products sales will be the product providers who can offer these additional profit opportunities for F&I, as well as offering upfront profits to dealers,” Tuno said. “All profit areas for F&I products that providers offer will be increasingly important to retailers as the margins for new and used vehicles is challenged to ever thinning margins. The entire process where profits are generated upfront, during the F&I sale and after the claims are paid will be important in 2018.”

In conclusion, said Randy Crisorio, the president and CEO of United Development Systems (UDS), “Automotive F&I participants must be nimble and prepare to address challenges and adapt to change in the coming year. They should expect a moving landscape in lender acceptance and in cost of credit. Nothing dramatic expected here, but there will be changes nonetheless.”

Processes and Technology

Without an F&I process, there can be no F&I sales. Without technology, the F&I process runs the risk of fading into irrelevance. So say many of our experts. But many others, including UDS’s Crisorio, say expectations must be tempered with some degree of skepticism.

“Technology advances by way of process integration and delivery systems will continue to be the hot topic in the new year,” he said. “Dealers beware of technology pronouncements that promise profit growth — well-trained people accelerate profitability, not computer monitors. Dealers beware of new technology with an expensive overload of bells and whistles that keep us from promoting fundamentals that energize our results. The human factor drives and technology aides.”

Crisorio predicted that dealers will continue to rely on “traditional F&I staffing scenarios” in 2018, and that the evolution of F&I products via expansion and adaptation will move at a moderate pace.

“F&I product evolution by providers trying to set their products apart from the masses and adaptation to an emerging retail landscape will be present but not as high-powered and visible as I expect technology to be,” Crisorio said. “Technology will be the F&I headliner for 2018.”

“The race to technology is a long and never-ending journey,” Doran said. “Of course, there will be developments. CDK and Reynolds will continue to attempt to bully themselves with threats of ‘long-term contracts or else,’ while scrappy startups will dazzle dealers with technology for discounted short-term or month-to-month deals.”

But Doran said the advancement of a fully digitized F&I process — one that does not require the customer’s presence at the dealership — will be the headline to watch for.

“Technology will play the biggest role in developing the conduit to consumer transactions outside the showroom,” he said. “These companies will also develop F&I product offerings via some kind of remote presentation. This is the technology I’m keeping my eye on.”

Bowron said that, while it may take a few years, he too foresees a greater share of the F&I process taking place online. Braganini predicted continued improvement of integration with DMS and menu providers. Lunt put the onus on product providers to “make it easier for dealerships to do business” in 2018.

“Providers that invest heavily and implement technology improvements that create a more seamless process for dealers, provide better transparency on profitability, and provide real-time performance metrics will be ahead of the curve,” Lunt said. “The more real-time data, the better, and technology will play an integral role.”

“I’ve never been what you would call a ‘techie.’ But I can tell you that the technology end of our industry is going to continue to change, and change quickly,” Roesel said. “A good amount of this pace depends on the state and county title offices. When they go paperless, it’ll be off to the races on all other aspects of the delivery.”

Kansanback concurred, predicting the trend toward an earlier, online introduction to F&I products will continue, but that is only one part of the digitization equation. “Early adopters will embrace a paperless deal jacket as well as utilizing pre-menus and menus that can be emailed. Technology is super important, but having solid processes with the right people will still carry the day.

“I also think we have to accept that the consumer isn’t going to be dazzled by an iPad or a huge computer desktop,” Kansanback added. “They are more sophisticated than we give them credit for.”

Reed said the technology that will propel F&I forward is already largely in place and available now. It’s up to dealers and dealer systems providers to embrace it and incorporate it into the product roadmap.

“What some companies call ‘digital retailing’ and what Cox Automotive calls ‘connected retail’ represents bringing together all parts of the deal to ultimately provide the ability for a dealer to do the complete deal — including desking, F&I, DMV and dealer docs — all online, regardless of where the dealer or the consumer are located,” Reed said. “That will start happening in 2018.”

Jacobs is less certain. “I don’t believe dealers have the expertise or processes to go totally paperless,” he said. “They are not ready yet to push the button and paperlessly econtract everything. They still make too many mistakes!” However, Jacobs, added, “They do need to speed the process to give F&I more time to sell.”

That is the central promise of the new technology available to dealers, Griggs said, but real results will require “significant investment” by F&I providers. “More dealers will demand instant access to their F&I performance as it continues to become more and more important to the overall financial performance of the dealership. Great F&I providers will be ready to provide this.”

Rules and Regulations

Whatever their political affiliation, anyone working in the automotive retail and finance industry had to admit some measure of optimism following the January inauguration of President Donald Trump. As the Republican candidate, Trump had promised sweeping regulatory relief if elected. He has largely lived up to that promise, even going so far as to appoint a man who once described the Consumer Financial Protection Agency as a “sad, sick joke” as the agency’s new director.

Lunt said he predicts a “relaxing” of regulations at the federal level but not any significant changes. In addition to the leadership change at the CFPB, the Trump administration has “decelerated and deemphasized” the push toward further
regulation. However, he noted, “Automotive dealerships remain primarily regulated by the Federal Trade Commission, and it is a very capable and active regulator.”

Lunt further noted that service contract providers are primarily regulated at the state level by insurance departments and other state agencies. State attorneys general, consumer advocates and plaintiff’s attorneys will remain vigilant, and so should dealers and providers.

“Regulatory scrutiny will continue to present, and the retail industry will continue to strive for greater transparency and professionalism,” Crisorio said. “Training will continue to be a focal point — doing things the right way despite what appears to be a diminishing influence of the CFPB and its unqualified practices of the past.”

“Because of the leadership change in the CFPB and the concomitant lessening of regulatory pressure on the lending and automotive industry, the landscape should be greener,” Smith said. “However, there are still many levels of pressure, such as the recent complaint filed by the state attorney general in New York for abusive aftermarket sales tactics.

“Bottom line, even though there is a lessening in certain regulatory arenas, the F&I and dealer community still needs to be cognizant of the rules and regulations in the marketplace,” Smith warned.

Tuno agreed, noting that, although there may be relief ahead, “The sheer volume of regulations that have emerged over the past 20-plus years has made this part of running the business extremely difficult.”

Like Smith, Tuno pointed to the “mini-CFPBs” that have sprouted up at the state level — including in his home state of Pennsylvania — in the wake of Trump’s election.

“This means that the retailer, product providers and distribution channels are all at risk due to the direct control the attorneys general have over these areas, especially if compliance isn’t a part of the culture or curriculum. The industry needs to be in better control of this risk and be in a better position to chart a safe course through this often-difficult area.”

Siegrist noted that some significant changes relating to reinsurance programs have already taken place. With tax reform came a “dramatically” changed landscape of dealer participation options.

“For example, given the new rules, dealers investing in non-controlled foreign entities must now evaluate the viability of these structures,” Siegrist explained. “The passive foreign investment company rules may significantly impact the taxation of these structures. Also, the new legislation reduces both corporate and pass-through tax rates which impacts the analysis of the appropriate dealer participation program that may best suit a particular situation. We have also seen increased interest in dealer-owned warranty companies.”

Dealers who operate their own reinsurance companies must also consider new diversification rules under IRC § 831(b) when operating their own reinsurance company, and additional disclosure requirements also exist under the new IRC § 831(b) requirements, Siegrist added.

“The IRS has yet to release guidance on these new disclosures. The industry is also waiting for guidance related to the new diversification rules. This lack of guidance presents its own challenges for dealers and their tax advisors,” she said.

Petrowski concurred, noting that, “In order for some of these programs to remain viable, they may be required to modify their structures to comply with these new requirements.”

The Subscription Economy

F&I owes much of its success to the concept of commitment: Car buyers commit to a vehicle, auto finance sources commit to the loan, and F&I providers commit to protecting the investment. As the subscription model catches on, Tuno said, the P&A segment will feel the difference — and could benefit.

“I see a great deal of impact of the subscription economy on the way consumers buy F&I products,” Tuno said, pointing to the success of companies like Amazon, Netflix and Spotify. “The subscription economy offers a tremendous upside to the industry, because it breaks the transactional revenue stream and provides for an annuity flow of cash stream for F&I products.”

Roesel expressed little fear of the shift toward a subscription model, believing that product providers will continue to innovate along with the market.

“This is a very resilient industry; we’ve always found ways to make money in most circumstances. This is no different,” he said. “Our processes will adapt as the framework of selling a vehicle changes. I’m certain there will be opportunities and products ahead that we don’t even see coming yet.”

“Today’s consumers are embracing the subscription model, and these consumers are primed to embrace F&I products,” Frommer said. “F&I products have always taken care of most of the consumer’s vehicle needs, similar to a subscription service. For the F&I department to capture the subscription-type consumer, they must bundle as many of their coverages into one product and offer the F&I products as a subscription-type service.”

“The industry seems to be addicted to single-premium products which are financed,” Bowron said. “The customer’s preference would probably be to have some of these products outside the loan. There seems to be a lack of suitable products for customers that aren’t financing, so development of these products will expand.”

Lunt described the subscription economy as a “structural shift” toward a more encompassing relationship with each customer. But F&I products require a high degree of specific underwriting performance, and that creates a unique obstacle for providers and administrators.

“The F&I industry, and the broader insurance marketplace, is built on pooling risks, but individually pricing each unique risk,” Lunt explained. “Unless providers can identify a way to accurately price subscription products, and have confidence in loss potentials to set adequate reserves, this could be a perplexing problem.”

Bold Predictions

Asked to offer further predictions for 2018, Griggs said he expects mergers and acquisitions activity among dealerships to build upon the momentum it has gained in recent years.

“I believe auto dealer consolidation will accelerate in 2018 as more profitable dealers gobble up weak operators and economies of scale become ever more important,” he said. “Major auto consolidators will finally reap the rewards of their past and present acquisition strategies — provided they have not overpaid for their acquired stores.”

Braganini predicted higher losses and pricing for GAP. Gruber said a growing cohort of high-mileage, rapid-depreciation Uber and Lyft drivers will negatively impact underwriting results for GAP and service contracts. Jacobs expects delinquencies and default losses to rise as a result of lenient credit purchasing and extended monthly terms. “It’s a cycle of greed and it is due to reappear!” he warned.

Smith predicted that 2018 will be marked by two characteristics: First, dealers will look for new ways to distinguish themselves from the competition, which could spur greater interest in loyalty programs and associated products. Second, investing in training and development will continue to pay dividends for dealers and F&I personnel.

“But distinguishing yourself from your competitors not only applies to the dealers; everyone operating in our industry needs to adopt the same principles,” Smith said.

Kathinokkula sees the future on a much larger scale. “Most people are well aware of the explosive growth in capabilities of artificial intelligence and big data. These are synergistic trends that are making systems more and more capable of predicting what will happen rather than explaining, via reports and dashboards, what has already happened. Artificial intelligence needs big data to act as a sample set to ‘learn’ from. And then the lessons learnt are applied to influence future transactions.”

Kathinokkula predicted that large organizations with “foresight, large data sets, and good budgets” will invest significantly in these emergent technologies. They will use them to calculate which coverages to offer to whom and at what price point to ensure maximum profitability and likelihood of sale.

“Toward the end of 2018, we are going to see reports of the first major inroads of such insights into menus and other selling platforms,” Kathinokkula said. “Furthermore, the first generation of such systems will streamline VSC and other mechanical claims to ensure more efficient claims processing.”

“For agents, the time is now. We have a great opportunity to help in a sales climate that will have dealers looking for help more than ever,” Kansanback said. “Even a slight downturn will produce some panic among some dealers, and that provides opportunity for the best agents to step in and do their thing — the manufacturers and big box providers are not equipped to help.”

Griggs said there is no reason for F&I providers to panic about the near future, even as they keep a close eye on the trends that will shape their success.

“Successful F&I providers that focus on creating wealth for their dealer clients through income development and great service will continue to fare well,” he said. “We offer consumer-friendly, value-added products that also happen to be a major driver of dealer profitability. What’s not to like about that position?”

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An Interview with Cindy Allen

An Interview with Cindy Allen

After a 10-year absence, Cindy Allen has returned to StoneEagle as the company’s new CEO. She rejoins a leadership team that includes her husband, Brent Allen, and her brother-in-law, Bobby Allen. P&A caught up with Cindy Allen shortly after the announcement to ask what’s in store for 2018, where her passions lie, and whether great singers are born or bred.

P&A: Cindy, you’re the new CEO of StoneEagle, but you are not new to the company, correct?

Allen: That’s right. I spent 15 years here on my first go-’round. I was vice president of the portion of the business.

P&A: How does that part of the business differ from the StoneEagle we know?

Allen: I’ll set the stage by saying that, when I first came in, there were only 15 people in the company, including Brent and Bobby. They just needed someone to answer the phone while their receptionist was on maternity leave. I found myself at the front desk waiting for the phone to ring. In the time between phone calls, Bobby challenged me to build StoneEagle a website.

Now, this was the early ’90s, before companies used websites to build communities, before search engine optimization. So I bought a how-to book, sat at the desk, and built a website. As a next step after completion of our website, he asked me to figure out how to connect our insurance administration systems to the internet as well.

At that point, StoneEagle’s credit life, vehicle service contract and F&I product administration systems leveraged IBM AS/400 machines. It was unheard of to connect large enterprise systems to the internet. That was the challenge Bobby put in front of me.

So, with guidance from Bobby and Brent, we worked with IBM to identify the other software layers we would need to connect our enterprise systems. We found the right tools and the right people and started development. It looked like a website, but it was really a connection between our web user interface back to our administration systems.

At that point, the dotcom boom was right around the corner. We were not sure how the company would evolve. We decided to spin the site off into its own little company, and at this point, it’s bigger than the administration system side of our business. It became my baby and I had chance to learn from that and the 15 years of growth that followed.

P&A: Where did you go to school, and what was your initial career path?

Allen: I went to the University of North Texas, and I actually went to school for vocal performance. My studies had zero to do with business or software or anything else I would use in my career. But that performance-oriented major made me comfortable in front of folks, particularly when giving presentations.

P&A: When you hear a great singer, how much of that is natural ability and how much of it is training?

Allen: It really depends on the singer and the genre. When you see phenomenal, classically trained performers? That’s a combination of raw talent, and a phenomenal musical ear — including the ability to really tune in — and significant hours of training and technique. Of course, in country or pop music, it’s a lot of personality and performance as well.

P&A: What’s your genre?

Allen: Contemporary Christian and jazz.

P&A: How far did you take it?

Allen: Since I got into the full-time swing of corporate America, I’ve performed at many weddings and led worship at church. I never went down the professional path, but it is a passion, a great love of mine. But I literally came in here as a temp and never got to leave.

P&A: And I understand you’re a serial entrepreneur.

Allen: I’m certainly entrepreneurial in the way I think. After helping start and then not only surviving that critical first two years but absolutely thriving, it gave me the fever to start and grow new things and see them to conclusion. Less than 0.4% of new companies will go on to produce $10 million a year. You will do several rounds of hiring before you get to the point where you need other people to hire for you. That initial phase gives you an opportunity to create an environment. But it’s also an opportunity to grow personally. You are absolutely in charge, and your own integrity affects the way you do business and your interactions with individual clients. You can create an organization people love to do business with.

It is incredibly motivating and rewarding to turn around and look at your people and know their lives have been impacted for the better by being a part of the organization, not to mention the lives of the people who rely on the services you provide. Then you see other opportunities, and it’s tempting. You think, “Is there a business there? Can it stand on its feet financially? Can it have an impact? Can we create an environment that people want to work in?”

So I don’t know if I’m a serial entrepreneur. I’m not out there starting new companies all the time. But I have had the chance to participate in several startups, and I love it.

P&A: Are you still able to control the culture once the company grows beyond its launch?

Allen: Great question. The first thing to know is you never have control of the culture. It’s a constant channel of investment. You have to be purposeful in everything you do. You have to keep an eye on the impact of the choices you make and how they affect your organization’s culture.

I think culture becomes an afterthought to most corporations. They let the pace and churn of the business take over. They forget that organizations are made up of individuals, and if you don’t have a purposeful focus on it, the culture is not going to be there. It takes an all-in effort from everyone in the organization. And when folks aren’t a great fit for the culture, they might feel a little uncomfortable. They either get in and get excited, or they leave.

P&A: What responsibilities have you been tasked with as CEO?

Allen: My primary responsibility is to come in and add support and structure to an already phenomenal team to drive growth. The executive leadership team here is fantastic. The cultures of StoneEagle Insurance Systems and are a little bit separated — not all that far off, but it’s a great opportunity to make those cultures more combined. I think that, in many ways, we’re still the industry’s best-kept secret. Some clients use a single StoneEagle solution and have no idea what else we can provide.

P&A: What do you have planned for 2018?

Allen: We spent the last few weeks slowing down enough to look at strategy. Companies grow in spurts. You’re growing internally, then adding clients and growing externally. As you gain momentum and scale, you need to pivot, adapt your processes to fit the new size, and look at how your teams are organized. It’s a question of where we’re at today and where we’re going to be tomorrow: If this is our big goal in 10 years, here’s where we need to be in three years and here’s where we need to be at the end of 2018.

Of course, new opportunities will come up along the way. You have to be purposeful, not reactive. Does this fit our strategy or not? Can our teams align to do what the client expects in the next quarter or the next year? In 2018, we will be closing on several major opportunities. We want to do that with a high degree of efficiency and create an experience our clients will love. I call that the “client experience design.”

We have had so much growth, especially over the past few years. Our team has done a phenomenal job, and we will do even better with a strategy that is built around that growth. We know the next wave of growth is coming. We want to be prepared for it and execute on it the best way we possibly can.

P&A: And that will include letting your clients know the full capabilities of the company.

Allen: Absolutely. It’s in the appropriate place in the strategy. You will begin to see us talk more and more about what we can do, end to end, in our industry. You’ll see it in the way we talk about our brand and the channels of access to our technology. There is a lot to look forward to. It’s an exciting time to be here. And I can’t say enough about what this company has accomplished over the last 10 years. At the same time, it will be exciting to see how we can grow in impact and size over the next 10 years.

P&A: What are your passions outside of work?

Allen: Family. We have two daughters, one married, and hopefully we will add grandchildren to our family soon. Our younger daughter, Andy, is in her junior year at the Art Institute of Chicago. She is predominantly art-oriented, incredibly creative, sings and plays guitar and piano. She would live life without a computer if she could. Our older daughter, Alex, is an entrepreneurial businessperson at heart and a total overperformer. She recently came to the company to work with our CTO on a temporary basis. Just a few days in, he said, “We need to keep her.” We are so proud of both our girls!

Passions change as life evolves, but I still have a tremendous passion for music, sitting down at the piano to play in my off time and leading worship at church. I love to cook. I love to do stuff with Brent. We love to go to our lake house in Oklahoma.

P&A: Now, I like Brent, but …

Allen: Thank you. I like him too!

P&A: We all do! But at some point, aren’t you going to get sick of each other?

Allen: You know, I spent 15 years working with him and about 10 not working with him. I far prefer working with him. I missed him like crazy, so I can’t tell you how thrilled I am to be back. I know it’s not the same for every couple, but it’s amazing how working in the same company and having the same knowledge of the workday — the challenges you had to tackle — it’s great. I love it. And I’m pretty sure he does too.

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An Interview with Terry O’Loughlin

An Interview with Terry O’Loughlin

Few executives in the F&I product provider and administrator industry possess the same diversity of experience as Terrence J. “Terry” O’Loughlin, an attorney, accountant, business school graduate and former regulator with the Florida Attorney General’s office. P&A met with the director of compliance for Reynolds and Reynolds to trace his career path, discuss the industry’s role in dealer compliance, and learn why some clowns are no laughing matter.

P&A: Terry, we missed you at Industry Summit, but you had a darn good excuse. Did Hurricane Irma hit you?

O’Loughlin: It was supposed to, but then it just slowly moved west. The worst part here in Fort Lauderdale was the close-to-100-mile-per hour winds. We had a tree knocked down and some damage to the shrubbery, and the pool was a mess. The people two doors down from us had a tree fall on their house. This is the fifth or sixth hurricane I’ve been through. Hurricane Wilma, in 2005, was the worst.

P&A: Are you not a native Floridian?

O’Loughlin: No, I moved here in 1989. I went to the University of Pittsburgh and then the University of Dayton, where I completed law school and business school in one program. I graduated in 1981, then went back to Pittsburgh for more postgraduate courses in accounting.

I wound up working in public accounting for three years and then in the securities business for four years. I had a great position with a portfolio management company. We were bought by a big New York firm in ’89 and a position cropped up in Florida. I made the move, and then that company underwent a disruptive reorganization about six months after I started.

Luckily, at that time, the state attorney general’s office was looking for someone to do securities cases. I had the right background, but I never did one securities case. My first case was the Killer Clown case, and that was my introduction to the car business.

P&A: Did you say “Killer Clown”?

O’Loughlin: You may have seen the news story a couple weeks ago. They arrested a woman wanted for murder in South Florida. She was suspected of being the Killer Clown.

P&A: OK, I did see that. It was a cold case.

O’Loughlin: That’s the one. In 1990, a fellow named Michael Kenneth Warren ran a buy here, pay here store and a car rental agency. He was married to a wealthy woman. They lived in a mansion in Wellington, Fla. One evening, there was a knock on the door. The wife answered and was greeted by a large person dressed as a clown, holding balloons and a bouquet. The clown handed her the flowers and then pulled out a gun and shot her right there on the doorstep.

The police thought Michael Warren was responsible. He employed a repo lady, a great big woman, and they figured she was the murderer. We had witness testimony that said the woman had bought a clown outfit and a gun. But the trail went cold. Years later, Warren and the repo lady married and relocated, and sometime after that, the authorities reopened the murder investigation. They got a warrant, tracked the couple down, and arrested the woman in September.

Meanwhile, in the course of the original investigation in 1990, the police found that Warren was engaging in criminal activity at the dealership — rolling back odometers, among other felonies. The attorney general sent me in to run the buy here, pay here operation. I was the receiver. I handled titles and collections and learned an enormous amount about car dealers. And with that, I became the car guy. I spent 16 years handling complaints for the attorney general.

P&A: Did you enjoy working as a regulator?

O’Loughlin: I did. The cases were interesting. There was a lot of satisfaction in being able to find a remedy. In a typical scenario, a customer would send me a complaint. I would subpoena the deal jacket, analyze it, and determine whether the complaint could be verified. I would figure out the damages and send a letter to the dealer with my findings: “You can accept this as a potential settlement.” No penalty. I just asked them to pay what they overcharged. Nine times out of 10, the dealer would send me a check. I rarely had a rancorous confrontation with a car dealer.

That said, we did handle a couple of multimillion-dollar cases, and they were not that easy. In 1994, we brought a $5 million case against a large dealership group in Florida. At issue was a failure to capitalize the transaction accurately. A customer would trade in a $5,000 car and it would become pure profit. There were probably 300 cases in which cars were literally stolen from customers through the transaction.

Now, I have to give this dealer group credit, because they ultimately assisted us in creating a motor lease disclosure act. We passed it in Florida and then Indiana passed the same legislation, verbatim. A lot of other states picked up on it as well, and that led to the federal Regulation M. I was interviewed on TV a number of times — “Primetime,” “Dateline” — and I was happy to do it.

Another big case I did was a national lease case in 2004 regarding a major captive. A number of consumers had terminated their leases early in order to buy the vehicle. The captive finance company would not give the consumer their payoff amount. They had to go back to the originating dealer. And if it was $11,000, the dealer might quote $13,000 and keep the difference.

Ultimately, we got 39 states involved and our efforts led to a $7.1 million settlement. The dealers just signed on and paid the dollar amount. To track all those transactions would have been murder. The captive stepped up and wanted to resolve it.

P&A: Any other big cases?

O’Loughlin: There was one other big case, a $1.8 million settlement with a very large Florida dealer. They had an F&I manager who was presenting single-payment lease contracts to seniors. He would craft the buyer’s order — not the lease contract — to say the consumer would pay half upfront and a small amount at the end. It bore no resemblance to any lease contract.

When the customers came to the end of their lease term, they had to pay a lot more to buy the car. I got involved when the local newspaper called me. They asked, “Can we send these complaints over? Can you tell us what it’s about?” I said, “If this is typical, the dealer has a big problem.”

The dealer’s attorney said the transactions were perfect in every way. We got into a real confrontation, went back and forth for a while. We then subpoenaed their records. They then sued the attorney general’s office and me personally for slander and defamation.

That really made the front page. People saw the coverage and stopped going to that dealership. The dealer came to us, begging us to settle with him. We did. The finance manager went to jail for eight years.

P&A: In the more typical cases, for which the dealer paid a penalty amounting to the damages owed to an individual customer, did you get the sense they considered that to be the cost of doing business?

O’Loughlin: I sensed dealers recognized the risk of having a meddlesome AG look at their files. They cut their losses and moved on.

P&A: Do you believe dealers are now more inclined to root out the source of those problems?

O’Loughlin: Not to praise dealers but to state a business fact, I would say they’re doing it a lot better than they used to. I don’t think there’s nearly as much fraud and deceit going on. Many more dealers are being much more responsible as corporate citizens.

P&A: Was there a point during your career in the public sector where you felt you had found your calling?

O’Loughlin: Unfortunately, the public sector doesn’t pay as well as the private sector. I had two young kids. I was open to other opportunities. In November 2005, I was reading Automotive News, and I turned to the back section with all the ads. There was a great big ad from Reynolds and Reynolds seeking a compliance director.

I remember thinking, “I’ve been auditing them for years. Their forms are pretty good.” I sent them an email and my résumé. I didn’t hear anything for weeks. Two months later, I received an email: “You meet our profile. Please do X, Y and Z.” A month later, I received a phone call, they flew me in for an interview, and I had a new job.

I’ve been with Reynolds for 12 years. As I did at the attorney general’s office, I do at Reynolds: Advance compliance solutions for dealers. I didn’t go after dealers because I hated dealers. I saw problems and tried to solve the problems. My job is still in the compliance arena.

P&A: And you get to speak at conferences. Dealers love to hear from “The Regulator.”

O’Loughlin: It’s great fun. It gives me a chance to talk about recent cases, new developments. I’ve got to tell you, the car business is endlessly fascinating. There are so many permutations.

P&A: And it’s changing.

O’Loughlin: It is, and hopefully for the better. I think it will. Last month, I went to Digital Dealer. What a hoot. Some of these speakers are in their late 20s, talking about the car business like they’ve been in it for 20 years. They think technology is the answer to everything. That’s true to some extent. But the industry is slow to change. But those who embrace change properly will do well.

P&A: What can the provider and administrator segment do to propel dealers forward?

O’Loughlin: There is much we can do. I was at a legal conference a couple years ago. The subject was limited partnerships. There were over 20,000 limited partnerships in the Caribbean that are dealership-owned, to a great extent, for the purpose of reinsuring ancillary products. And there are over 5,000 kinds of ancillary products — that’s types of ancillary products, not number — with all their variations.

My point is that this is an enormous enterprise. There are so many organization involved. And look at those that have failed in the past — major ones, like Fidelis. Millions of dollars were lost because they were not doing the right thing. The companies that I know that are selling ancillary products, be they GAP, service contracts or anything else, they’re being quite mindful of the process.

But some of these vendors will be subject to CFPB oversight. The bureau, generally, doesn’t think these products are worth that much.

P&A: You wrote about that for this issue. You made the point that our industry is too big to ignore.

O’Loughlin: Correct. In 2010, shortly before the Federal Reserve Board transferred its oversight power to the CFPB, the Fed was coming up with a new notice for car buyers. It read, “Stop! You do not have to buy this product to get this line of credit.” Then it went further, in bold: “You may not receive any benefits even if you buy this product.” This was supposed to appear in retail lease contracts. It never did.

I point this out because it proves there is a great deal of concern. Every year, the Consumer Federation of America and the North American Consumer Protection Investigators puts together a consumer complaint survey. Every year, right at the top of the list, it’s automotive dealers. It should be weighted by size. If it were, dealers would be far lower, I’m sure.

Good vendors should welcome scrutiny. It’s a good opportunity to explain our value. Go ahead, call your vendor. Ask what they’re doing to protect you and the consumer. Any good vendor should welcome that. Here’s how we do it. Here’s how we pay for it. Here are our legal resources, our accounting resources. Here’s how we go about it.

P&A: Sounds easy enough.

O’Loughlin: If the dealer goes through these procedures, there shouldn’t be any problem. The problem arises when the F&I manager wants a disproportionate profit from the ancillary product sale and the dealer has no way to discipline that behavior. Prices vary, but in the same class, pricing should be the same or similar. Some service contracts cost more than others. But if it’s “Silver” or “Bronze,” the pricing should be similar so the finance manager will be disciplined in what he’s offering. Occasionally, you will get guys who are not as forthright as they should be. Seems to me you should get rid of them immediately.

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An Interview with Brian Krasavage

An Interview with Brian Krasavage

In July, Brian Krasavage became vice president of Allstate Dealer Services. It’s the latest development in a career that spans four decades and has included history-making stops at Kodak, Motorola and ADP/CDK Global. P&A sat down with Krasavage on the eve of his relocation to Jacksonville to discuss the sweeping technological advances he has witnessed and why he is in “good hands” with Allstate.

P&A: Brian, where are you from?

Krasavage: I currently live in Chicago and I am making my way to Jacksonville. But I’m originally from Upstate New York. I worked for Kodak for nearly 20 years, starting in Rochester, and then I relocated with them to Atlanta in ’98.

P&A: Those were the days of wine and roses for Kodak.

Krasavage: Exactly. There has been a lot of change in that industry over the years. I studied computer science at Potsdam State, and I actually started working for Kodak in the mid-’80s, while I was still in school.

P&A: Computer science was a smart choice.

Krasavage: I hate to admit, it but I was part of the last freshman class to learn punch cards.

P&A: What are punch cards, exactly?

Krasavage: Lines of code on a series of cards. It was a way to load programs. And if an upperclassman kicked them out of your hands on the way to the machine, and they got out of order, it was a hassle.

P&A: How did you connect with Kodak?

Krasavage: It was a work study program. I took every other semester off to go to school.

P&A: Did they help with tuition?

Krasavage: I got paid, so in that sense, yes! After graduation, I joined the company full-time and spend the first nine years of my tenure doing software development — a lot of statistical control for processes, such as coating. Before digital cameras, there were chemical coatings for various types of paper and film.

P&A: Is it true Kodak invented the digital camera and failed to capitalize on it?

Krasavage: That’s a bit of an urban legend. Kodak did have one of the first digital cameras. Back then, due to the cost of the technology, it couldn’t be considered a consumer product. So I don’t think you can fairly classify Kodak as having missed the boat. I think it was more a matter of photography turning into a different industry. And Kodak’s competency was not as an electronics provider.

P&A: Why did they move you to Atlanta?

Krasavage: They moved their entire Americas headquarters to Atlanta. I had spent about 10 years or so in IT and I wanted to get into the business end of things. At the time, Kodak had a requirement that you had to go through market research to work on products. To work in market research, you had to have an MBA. So I earned my MBA from the University of Rochester, then spent about a year in market research. I did global product management for digital photo-finishing products. I was there for the launch of the Kodak Picture Maker. I spent a large part of my career there working on product development, marketing and sales for it.

P&A: The kiosk? I remember that. It was a big hit.

Krasavage: For all the difficulties Kodak’s been through, that product is still printing money for them today. Innovation doesn’t have any discretion. When we launched Picture Maker, it was a pain in the butt for customers to find negatives and make prints. We gave them an easy way to bring in any picture and reprint it or blow it up. And I enjoyed the marketing aspect of the business. We had a big partnership with Disney. We would drive the kids down to Walt Disney World from Atlanta. They loved it, but it got old, fast. Funny story: I did a stint in sales and business development. We had an annual awards program. In my first year, I won the top sales award and a trip with all the sales leaders. Guess where the trip was.

P&A: Disney?

Krasavage: Disney. The year prior, it was Hawaii.

P&A: Did you plan to retire with Kodak?

Krasavage: Well, there certainly are a lot of long-tenured employees at Kodak. My dad and my father-in-law both retired with Kodak. My sister still works there. But I had moved all around the company — different capacities, different regions — and I just decided I wasn’t going to end my career there. Then it was just a matter of finding a new opportunity. At the time, we were looking at how we could advance the product to allow for printing from digital cameras and camera phones. The opportunity came up to bring my experience in imaging to Motorola.

P&A: When was that?

Krasavage: That was in 2005. Motorola only had one camera phone model that had high resolution, which at the time was just one megapixel. Motorola, like many telecom providers, was taking orders from carriers — AT&T, Sprint, Verizon. Motorola wanted to be an organization that understood the consumer value proposition. What’s the experience that will drive value for the customer? They were forming different categories for business. I was brought in to kickstart their multimedia and sharing business.

P&A: Were you successful?

Krasavage: Yes, but not without challenges. We were a small software group within a large hardware company. Motorola was going through eight consecutive quarters of growth with the Razr. But we knew the software would drive the value. Apple made that clear with the iPhone. I think Motorola could have been more successful.

P&A: Did you see the iPhone coming?

Krasavage: I don’t think anyone saw that coming. We knew software would drive wireless forward, but for the iPhone to enter our industry and absolutely dominate it, that changed everything.

P&A: Did the success of the iPhone spur a culture change at Motorola?

Krasavage: Yes, a big culture change. The hardware would always be important, but it became clear that having a strong software strategy would drive the industry. At one point, we were using five or six software platforms. By the time I left, we had standardized everything on Android. And that ultimately led to Google purchasing Motorola in 2012. That acquisition was intended to create the same model Apple had: owning the hardware as well as the software. So that was a really unique business experience.

P&A: That’s a short amount of time for a major transformation.

Krasavage: Very short. Between 2005 and 2012, Motorola split into two, refocused on software, and completed the Google acquisition. There is no other industry like wireless. The playing field can level at any moment. But it was a great opportunity to work for a great company with a big, global footprint.

P&A: Did you become a Google employee?

Krasavage: I did, briefly. But I decided to make a change, and that’s what took me to ADP, which later became CDK Global. I joined ADP in 2012 to work on their dealer services business. That was my first introduction to automotive. I loved it. They say once you get into automotive, you’re never going to leave, and I believe it. I joined ADP/CDK in 2012 and had responsibility for F&I. My focus was on software services, the menu product, compliance and contracting. By the time I left, I had responsibility for all the products in the front office. My team did some of the early work in digital retailing, including workflow, F&I, credit, compliance, econtracting and electronic vehicle registration.

P&A: Once again, you joined a company during a major industrial shift.

Krasavage: Yes. And when I started, I was surprised at how fragmented and complex the dealership front-end processes were. The front end is under pressure from a profitability standpoint. But that’s your moment of truth. You’re trying to capture the customer for life. Do you want the best process or the best customer experience? Dealers have begun to understand the experience is what counts, but delivering it is a challenge the whole industry is facing.

P&A: So you were at Kodak when the photography industry changed. You were at Motorola when the wireless industry changed. And you joined ADP/CDK in the midst of the digitization of F&I. Please take this question in the spirit in which it’s intended, but do you ever feel like the Forrest Gump of innovation?

Krasavage: I have thought about that myself. And I don’t know if innovation attracts me or I’m attracted to it. Looking back on all the transformations I have witnessed, I’ve decided I’m attracted to innovation. My entire career has been spent in areas where a market transformation is going on, all driven by underlying technology that’s enabling new consumer experiences and expectations.

P&A: How did the opportunity with Allstate come about?

Krasavage: I got a call from Allstate about this opportunity and, to be honest, I only answered the call because it was Allstate. You don’t have to live in Chicago to appreciate the work they do, but they are headquartered here, in Northbrook. And I was intrigued, but I did not want to leave the automotive industry. So when I learned it was Allstate Dealer Services, I was really intrigued. And I was impressed with the passion of everyone I spoke to here. They are focused on the changes in our industry — transportation, technology, mobilization — and that caught me by surprise. Our products add value and protect customers from risk. That’s powerful. And the company is run by a strong set of leadership principals. It starts with our CEO, Tom Wilson, and it carries all the way down. When they say “You’re in good hands,” they mean it. And all the employees of Allstate Dealer Services have a tremendous passion for the business and love F&I as much as I do.

P&A: Are you ready to move south again?

Krasavage: You know, if you need a snow blower, let me know. My wife has never been a fan of winter weather. We have both seen enough of it. And the timing worked out great. We have four kids, and the youngest will be a college freshman in September. And we happen to have family in the area. My daughter still lives in Atlanta. We have lived in several cities, and there are pros and cons to each. But being near family is the biggest benefit.

P&A: How many people have told you Jacksonville is technically the largest city in the United States?

Krasavage: Everybody. And by the way, all that square mileage makes house hunting a little difficult. It’s all “Jacksonville.”

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How to Adjudicate Claims for High-Risk Clients

How to Adjudicate Claims for High-Risk Clients

In the P&A segment, working with high-risk clients can lead to financial rewards, but runaway claims bear scrutiny. At last August’s P&A Leadership Summit, I had the honor of leading a panel of experts in a discussion about anticipating, identifying and properly managing such scenarios.

I was joined by Trish Myers, a senior financial analyst with EFG Companies; Matt Russell, risk manager for AUL Corp.; Jeff Robinson, Alpha Warranty’s vice president of risk and operations; and John Sopocy, vice president of claims and risk management for Vehicle Administrative Services.

Identify the Risk

The term “high-risk” can have a number of different meanings, Sopocy said, so the first step is to identify the type of risk at play. If a dealership has a core customer base that is outside of the usual ratio the company uses to determine risk, for example, that could be skewing the results.

Myers suggested the next step could be to look at how long the service contracts have been active when the claims are initiated, as well as the severity — are they within expectations for that dealership’s vehicle mix and market? If they are consistently steep, “That can be an indication of dealers not prepping the cars for sale,” Myers said, noting dealers can fall into the habit of using claims to pay for reconditioning. She also advises providers to look at earnings and loss ratios — some early warning signs might not be valid, she stressed, so it’s important to gather all the data and take the time to understand what they mean.

This can be a complex process, Russell said, but he agreed it is necessary. “We try to split the data between the statistical side and the behavioral side. It’s important to look at those earnings and loss ratios and other statistical models, but it’s just as critical to look at the behavioral data as well.” He said a review of service-drive records can help determine whether high-risk red flags are just a series of coincidences or a clear pattern.

But just identifying a potential risk isn’t enough. “The first move, after identifying a high-risk dealership, is to have a conversation with them,” said Robinson.

In many cases, the panel agreed, the dealer and their top management team is not aware of how the products are performing. Some are getting incomplete reports from their F&I or service directors; others simply aren’t interested. This can lead to awkward conversations with dealers and dealership personnel, but determining whether a client is “high-risk” is difficult without getting the big picture.

One way to approach the subject is to ask the client to “show the numbers, don’t explain the numbers,” said Russell. He noted that he’ll compartmentalize the data, setting aside, for example, vehicles with extremely high mileage. Then he’ll segment by make and model and even by engine type, if he’s able. “In essence, we’re just trying to show the ‘Why,’” he said, which in turn helps the conversation go more smoothly. The claims administrator then avoids the appearance of leveling accusations. They are simply bringing a business problem to the table and asking, “What can we do to fix this?”

Myers agreed and said this approach is typically well-received. “I’ve never had pushback from the service manager or general manager of the dealership.” She noted that, most of the time, the provider is viewed as a partner, and the dealer wants to get to the bottom of losses and increased claims just as much as the provider does.

Control the Costs

So how can providers keep the cost of high-risk dealerships from spinning out of control? To start, said Sopocy, it’s about stating upfront what is covered — and what isn’t — so everyone is on the same page. He noted that the two biggest cost generators tend to be pre-existing conditions and “upselling,” when the customer brings their vehicle in to address one problem and the service advisor convinces the customer to fix something else.

“On a claim-by-claim basis, it can be really hard to detect that,” Sopocy noted. An individual claim for an oil gasket replacement might appear to be valid on the surface. But if the customer just came in for a standard oil change, and they were then convinced to replace additional parts, it’s a problem.

To combat that, Sopocy advises providers and administrators to have the conversation about expectations as soon as possible. Making sure that the service advisors know that it’s OK if a part is a bit more worn on an older vehicle — that doesn’t mean it has failed or will fail. Replacing it just because they can is a waste of everyone’s time and money. One of the ways they train for this, he noted, is to ask service advisors a simple question: “If this was your car, would you take $500 out of your pocket to replace the part?” In most cases, they say they would not, and that establishes the correct mindset.

The next step is to teach service advisors how to document correctly. Rather than just submitting a claim for an oil gasket, they should note in the paperwork that the customer came in for an oil change and it was noticed that the gasket showed signs of wear.

Russell agreed that getting everyone on the same page is a good first step to controlling costs. With buy-in across the board, a process that will work for everyone can be developed. “It’s about getting everyone on the same page so they know what to expect,” he said.

Robinson agreed, noting, “The dealer needs to understand that it’s a partnership, and that our goals are aligned. … When it’s a healthy book of business, the customer is happy, the service center is happy, the dealership is happy, the administrator is happy — everybody is happy.”

Redemption: Turn High-Risk Clients Into Low-Risk Clients

The panel agreed that, just because you have identified a dealership as high-risk, that doesn’t mean they have to stay that way.

Redemption is possible, Russell said, and it comes in many forms. For new clients, it may just be a matter of patience: It is not uncommon to see a high rate of claims for the first wave of service contracts that flattens out over time. He also noted that, for administrators, it is always worth checking the notes of the claims adjusters. They are on the front lines, and have a much better idea of what is actually going on. Reporting is key, because you have to understand where the problem is if there is any hope of fixing it.

In some cases, Russell pointed out, one make or model can cause the bulk of the issues. At the end of the day, the dealership has to be willing to trust and buy into the administrator’s recommendations. “It’s about trusting us, working with us,” he said.

To get there, said Sopocy, it really is critical to approach them with the numbers — show them their losses today and demonstrate what the projections will be with a different process in place. “If you lay it out, here’s where we are, and, if nothing is done, it stays the same. Here’s where we’re going to be a year or two from now, and it’s normally not a very pretty picture. And then you model it by ‘If we reduce claims, this is what can happen; if we add additional sales, this is what could happen.’ You can show them a couple different ways to get it to a better space.”

If they are a good client, Sopocy added, and they are committed to making it work, the administrator can lay out different strategies — including at least one that doesn’t necessarily include a rate increase — to improve performance across the board and reduce the client’s risk factor.

Russell agreed, adding that it’s important to understand that, in some cases, risk and redemption can’t be had by simply increasing rates. An increase for a given dealership — or even for a given geographic area — can’t be helped because the risk factors just can’t be mitigated any other way. But he stressed that the other solutions should be tried first. If the first time a dealer hears about a problem is when their rate is going up, that doesn’t make for a very profitable partnership on any level.

The agent is another important factor, Russell added. Having a solid relationship with them, and making sure they have all the tools and information they need is important. They can be the provider or administrator’s “boots on the ground,” ready and available to talk to the dealer when a problem first surfaces. “Getting the agent involved is key,” he said. “They’re the ones who hold the relationship.”

Robinson noted that the agent is the first person some dealers call when they have an issue with a claim or anything else. The agent can therefore be helpful in determining whether there is an issue that needs to be solved, with or without the administrator’s help, or whether it’s an isolated incident, a coincidence, or a spike that will level off in time.

Just because a dealership is high-risk, doesn’t mean the provider shouldn’t take a chance — and high-risk today doesn’t necessarily mean high-risk tomorrow. Many dealers will welcome the chance to work with administrators to improve programs and profits, and can end up being some of the most loyal and reliable customers the provider has on the books. It’s all about managing the risk appropriately, setting expectations, and offering the right training to the right people.

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An Interview with Bob Wilson

An Interview with Bob Wilson

Robert Wilson Esq. is the founder of Wilson Law Firm in Media, Pa., general counsel for ARMD Resource Group, and a frequent contributor to P&A. The magazine caught up with Wilson to learn more about his career, his path to the automotive industry, the future of the CFPB, and the pitfalls of free legal advice.

P&A: Where are you from, Bob?

Wilson: I’m from Philadelphia. I grew up in the Germantown section, which had some significance during the Revolutionary War. Some big losses on our side, actually, but who’s counting?

P&A: What were your career aspirations?

Wilson: I didn’t really have a defined idea in my younger years. I went to undergrad at Dickinson College in Carlisle, Pa., where I entertained the idea of working in radio and television. I had a weekly show at the campus radio station. I’m dating myself a bit, but our main broadcast booth had two turntables, and the back room was stacked floor to ceiling with record albums. It was a one-man show, 9 to 12 on Thursday nights.

P&A: What did you play?

Wilson: We weren’t subject to playlists, so I would play whatever music I wanted. Sometimes rock ’n’ roll, sometimes funk, sometimes late jazz. The only proviso was that you had to make public announcements and you couldn’t say any of George Carlin’s seven dirty words.

P&A: How did you go from disc jockey to law school student?

Wilson: I had received an offer to do an internship at a television station, and it was a good opportunity, but I was committed to my housing situation and I had to turn it down. That’s when I thought I’d better change direction. I had taken a fascinating law course in high school. It was an overview of historical decisions with a focus on constitutional law, including a lot of First Amendment-type issues.

P&A: What exactly does it mean to practice constitutional law?

Wilson: Laws come from many sources. A new law could come from a federal or state regulation, for example, and it could come from the Constitution. Constitutional lawyers and scholars are focused on that slice of the legal pie.

P&A: Which law school did you attend?

Wilson: I attended law school at Temple University, back home in Philadelphia.

P&A: Any memorable experiences?

Wilson: Not so much. Law school is a difficult process. The first year, you’re in shock. I remember trying to wrap my head around the idea that my entire grade depended on the final. Blow one question on a three-question final and you’re toast. And you’re introduced to the Socratic method, in which the teacher engages you in front of the class. It’s a bit of a change from the traditional approach to teaching. You can’t allow yourself to be intimidated.

In your second year, they pile on the work, and in the third year, you start looking for a job. There are a series of challenges along the way. They teach you a certain type of analytical thinking. It bleeds over into other areas of life. Whatever the situation, you find yourself asking, “What’s the issue, what law applies, and what’s the solution?”

P&A: I asked Aaron Lunt whether he is bothered by people asking for legal advice in social situations. He said he is more bothered by the fact that he often doesn’t have an answer.

Wilson: No man can be the master of everything. A lot of attorneys are familiar with a recent case in which a lawyer, at a party, was asked for advice. The person relied on it, took a loss, and sued. The lawyer said, “Look, we had no fee agreement, no understanding.” And the judge said, “When you give legal advice, you have to believe people will follow it.” So the lesson there is, when you’re in a social situation, limit your conversational topics to football.

P&A: How did you choose which type of law to practice?

Wilson: My first job out of law school was clerking for a homicide judge. I then practiced a fair amount of homicide and matrimonial law, and I became convinced the two go hand-in-hand. Working in the criminal realm, I learned you either become a district attorney or a defense attorney, and it seemed like the only defendants who could afford their own attorney were involved in drugs or organized crime. That was not an area I wanted to be in, so I jumped the fence to the civil side, and I haven’t looked back.

P&A: What was your first job on the civil side?

Wilson: I worked at a plaintiffs’ personal injury and medical malpractice firm. We handled some memorable cases. We brought a number of motorcycle helmet defect lawsuits and some cases that involved diethylstilbestrol, also known as DES, a synthetic form of estrogen that was linked to a specific type of cancer.

P&A: How did you break into the auto industry?

Wilson: I started working in consumer finance about 25 years ago, and the two segments are very closely related. They are subject to many of the same regulations and watched by the same regulatory bodies. Since then, we have watched the explosion of the Consumer Financial Protection Bureau onto the scene. It certainly makes for some interesting times. Everybody is focused on what’s coming next. The PHH case is going to be reargued soon, and that could give us another read on the constitutionality of the CFPB itself.

P&A: That case came out of the mortgage industry, correct?

Wilson: PHH is a mortgage company the CFPB went after and upon whom they eventually imposed a $100 million penalty. PHH stood up to the CFPB and appealed, and the appeals court judge found the CFPB’s single-director structure was unconstitutional. The next step is an en banc hearing, which is scheduled for April. Meanwhile, there has been a lot of talk swirling around our new president, who promised sweeping regulatory changes.

P&A: Has Trump specifically mentioned the CFPB?

Wilson: I don’t profess to follow everything politically, but he did say he was going to dismantle the Dodd-Frank Act, and the CFPB is essentially the child of Dodd-Frank. A lot of people are hoping — secretly or not — that the CFPB will be dismantled.

I personally don’t think that is going to happen. There is certainly a possibility it could be scaled back, but it’s not going away. And don’t forget, the regulatory landscape is not solely composed of the CFPB. A number of agencies have oversight, and all those other entities, including state attorneys general and consumer groups, will still be there.

P&A: What is your day-to-day workload like?

Wilson: It varies, of course. I do a lot of work in the financial sector. I also have a regular commercial litigation practice, and I handle general civil matters and compliance issues in the consumer finance space. And I have been working with ARMD Resource Group, which is coming to market with a compliance management system for the automotive space.

P&A: How did you end up writing for the magazine?

Wilson: I met the publisher, David Gesualdo, through a mutual friend. We had some discussions and one thing led to another. I hope the articles have been helpful. A good teacher can make a complicated subject easy enough to understand. A teacher with less skill will hit you over the head with big words and concepts and fail to convey the lesson. I want to teach in a more efficient fashion, and I think that’s something that ARMD looks to do as well.

P&A: Why is it important that agents and product providers stay current on compliance matters?

Wilson: Because for dealers, the No. 1 goal is to sell cars. They need good advice and a compliance management system that automates the process and makes repeatable, consistent performance possible. There was an ad campaign for Staples that featured a big, red “Easy” button. I think that’s what ARMD represents. It’s an “Easy” button for compliance procedures.

P&A: I agree that dealers are focused on sales, but wouldn’t you agree that all the recent enforcement actions have compelled them to take compliance more seriously?

Wilson: I think that’s absolutely correct. There’s an old saying for which the first part is “Money talks.” We’ll skip the second part. But, yes, when there is a massive monetary penalty for disparate impact or unfair, deceptive or abusive practices — whether it’s coming from the CFPB or an enterprising class action attorney — that gets the dealer’s attention.

But as a practical matter, when the dealer makes fair treatment of every customer a priority, that makes perfect sense. It’s a way of generating the type of loyal customer everyone is looking for.

P&A: Every F&I trainer I know says transparency sells.

Wilson: They’re right. It’s all about relationships. Any good relationship has trust. If you’re not treating people fairly, you’re never going to earn their trust. When you have policies and training in place, again, you can go out and do what you’re best at, which is selling cars.

P&A: And F&I products.

Wilson: Right!

P&A: What do you do in your spare time?

Wilson: Well, I spend most of my spare time with the family. We like to travel. I’m an avid bicyclist and, once in a while, I try to find the fairway. It’s a work in progress. I came to the game late in life. But there is something pretty rewarding about being outside, spending quality time with clients, and discussing these topics over 18 holes.

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