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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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Govern or Be Governed


On Sept. 9 at Paris Las Vegas, attendees gathered with high expectations for the first panel discussion of the 2015 P&A Leadership Summit. “Govern or Be Governed” promised to tackle the question of the Consumer Financial Protection Bureau (CFPB)’s likely involvement in F&I products and what the industry should be doing to prepare for it.

Tim Meenan, managing shareholder of Meenan PA, served as moderator. He was joined by Steve Amos, president of GSFSGroup; David DeCredico, senior vice president of business development for EasyCare; Doug Frey, executive vice president and COO at Allstate Dealers Services; Mark Macek, president of United States Warranty Corp.; and Kelly Price, president of National Automotive Experts (NAE).

The group appeared to rather quickly reach a consensus: Yes, the CFPB will eventually set its sights on the F&I product segment, and only proactive steps, taken immediately, can help mitigate the potential challenges that will result. With terms such as “tyranny” and “czar” being used freely, it was not difficult to gauge the panel’s collective opinion of the agency or its leadership. At one point, Meenan noted that, for providers, however the situation is approached, there is a good chance that it would be a lose-lose proposition.

“Either the sales guys are going to shoot you in the back or regulators are going to shoot you in the back, and you’ve got to decide who you want to get shot by,” he said, adding that he doesn’t believe providers and administrators should just stand by and let it happen. “I don’t think we bargained on the CFPB. We all felt pretty safe and secure, and now we’ve had a paradigm shift. We’ve had to really look at some of these issues, and they raise a lot of interesting questions. We know these are thorny subjects with no easy answers.”

The Nitty Gritty

To get things started, the panel tackled the most basic question: Will the CFPB apply its controversial disparate impact analysis to ancillary products, including the full range of products sold in the F&I office?

“About a year ago, this came up on my radar,” said Frey. “We should all be looking at the impact the CFPB would have on our industry. I think we want to preserve our whole industry, so I recommend that all of you take the time to really study the issues and come up with a strategy for moving forward. The strategy we developed was really to tackle disparate impact first. That’s the biggest thing they’ve gone after in the finance companies, so we developed what we are calling ‘retail pricing guidelines’ for our agents to deliver to the dealers. We put a recommended ceiling on service contracts and on what the markup could be for the ancillary products, including GAP. Incidentally, we believe GAP will be the most likely place the CFPB will come after people in our industry, because of the tie-in to the finance contract. The first thing our agents said when they got the new guidelines was, ‘We can’t go into the dealers and do this.’ But after having a few agents who sit on our council go through them and help us develop a strategy to educate the dealers, they started to realize we’re not just doing it to put the providers in a better spot. It’s really to help dealers be more compliant.”

Frey emphasized that the guidelines were designed to convince dealers to charge every customer the same amount to eliminate even the possibility of charges of discrimination. He also noted that this doesn’t mean never having any pricing variations. Rather, he said, dealers need to make sure they’re documenting any changes and the specific reasons for them. For example, if the dealership runs a special of the week on trucks, so the markup on F&I is a bit higher to make up the difference, that needs to be well-documented, and the dealer needs to be able to show that the changes were made for every customer who walked in the door during that promotion.

In Florida, Macek noted, his company actually worked with lawmakers to amend certain rules to include ancillary products in an effort to get ahead of possible CFPB regulations. Those changes include having dealers and providers file the rates and retail pricing of the products so consumers can’t be over- or undercharged.

“We were able to work with the government state insurance office to get statutes passed that protect dealers and providers, while at the same time ensuring they are actually fair to the consumer,” Macek said. “There are some providers and agents that will pay different commissions to the dealership — to secure the business or meet a requirement for reinsurance, retro or walkaway — so we have to deal with that issue as well. But I think this kind of approach is the way to go.

“Florida eased up on having the rates on file with the government, but you still have to have on record somewhere what your rate is, and you cannot deviate from that. You cannot mark it up or rebate to the consumer. And, actually, it has helped keep the F&I profit per vehicle on an even keel. There are no more highs and lows to contend with. I don’t know how big of a task it would be to pass this kind of legislation in all 50 states, and I’m not sure the industry even wants to go that route, but that’s how we operate in Florida and it seems to work pretty well.”

“The reality is that, whatever path the industry takes, it’s going to require a coordinated effort on the part of providers, dealers, F&I departments and technology vendors,” noted DeCredico. “You always beg the question: If the CFPB can and does put some limits on F&I, what’s the appropriate markup? Who’s going to say how much you can make on a product, whether it be tire and wheel or dent repair or anything of that nature? There is technology in place to handle this situation, however. In the state of Florida, we have a blueprint for how to apply rate consistently across a large area with multiple locations. So the real question is going to be, are you willing to walk away from potential business if your markup isn’t satisfactory to what the dealer may want, or if they think they can get a larger markup from someplace else?”

Amos noted that the conversation needs to go beyond just markup, however. “The only price limit [finance companies are] regulating right now is how much you can mark it up. But that doesn’t solve the disparity issue and that’s the longer-term concern,” he said. “I think in the end, it’s either going to be the finance companies regulating us or we can regulate ourselves, which would probably be the best solution. One of the solutions we’re looking into is to have individual dealers or dealer groups each with their own set of prices, so that they’re consistent across the marketplace. That probably would be a better solution than our industry having to come in and do it, but the question remains: Is that going to be a viable long-term solution?

The Value Proposition

The panel then shifted gears to take a closer look at the value of the products themselves, another area many fear the CFPB will target. Meenan said there’s no denying the value of a $600 GAP policy that ends up getting $5,000 waived on a loan, or a consumer paying only $2,000 for a service contract that covers $14,000 worth of repairs. The problem comes when looking at products where, potentially, a customer could pay $500 for a contract that brings a maximum benefit of $400.

“I think the products themselves have value, and I think it’s up to us and our dealers and agents to help educate consumers and regulate some of those pricing issues,” Price said. “We have had situations where a product that has a $4,000 benefit was being sold in F&I for $5,000 and we’re very quick to reject that contract. I think we, as a group, need to make sure none of that is happening at the dealership level. Those lawsuits hurt all of us. We need to get together as a group, set the standards and best practices, and say, ‘This is our suggested retail markup.’ We have to get those set prices and not allow the F&I manager to move it up or down, or control what products are offered, making sure every product is offered to every single consumer at a reasonable price — if not the same price — every single time, with no variance between consumers. It would be nice to know we’re all protecting each other and not allowing dealerships to sell any products above their stated value.”

One thing to keep in mind, the panel agreed, is the full value of the contract. They discussed the example of a $1,000 key replacement contract which, if it only gives the consumer the opportunity to replace a $400 key fob once, is not going to stand up to scrutiny. But if there’s no limit to the number of times that key fob can be replaced under the contract, the value to a car buyer such as Meenan, who admitted he has “lost track” of the number of times he has misplaced his own keys, would be abundantly clear.

A Community Affair

One of the issues all the panel members agreed on was that any sustainable solutions would require an industry wide consensus. One or two providers who are going it alone might find workable short-term solutions, but the larger problems the CFPB could conceivably pose won’t be solved without a team effort.

“How can we do this as a group?’” Frey asked. “We need to say ‘Here are the standards we’re all going to use and here’s how it’s going to work.’ In order to be proactive — which is what I think all of us on the panel are trying to do — we probably need to even go a step further and fund someone to start working on developing standards before the CFPB actually comes after one of us.”

“I also think that if we could find some common ground, at least by dealership, if not for the industry as a whole, it would make a difference,” said Price. “Then you know, as an F&I manager, that the price you’re selling the product at is the same price the F&I manger in the next office is selling it at. It would give the F&I manager a lot more confidence — as well as the salespeople and anyone else in the dealership — to know there is nothing to hide. You’re not in a snake oil-type business. You’re selling products with value. When you’re standing at Best Buy and they offer you something, the guy at the cash register doesn’t get to go ‘$99, $89, $79 — do I have a buyer?’ They know what the price is, they sell the value and they have confidence in the product. It would give us all a lot better ground to train from if we had firm pricing, and it would, in turn, offer that confidence to F&I managers.”

Meenan raised the issue of exclusions as well, citing CFPB-issued orders against DFS and US Bank regarding GAP insurance. In the order, he explains, the companies were fined because they hadn’t listed every part on a 10,000-plus part engine that weren’t covered.

“In fact, I went and pulled the actual brochure on this program, and it was pretty well done,” Meenan said. “It said, ‘Not everything is covered. Please check your terms and conditions carefully for what is covered and what is excluded.’ And it was there in fairly large print. And they got fined for not telling them every single part. Elsewhere in the order, [the CFPB] said, in the future, they at least have to describe the nature of the exclusions; just saying there are exclusions isn’t cutting it anymore. And I don’t believe they intended it to apply only to direct marketing. They meant it for point of sale at the dealership.”

“Wow,” Amos responded. “I think a lot of us have contracts where we have new-car coverages that are basically an extension of the factory warranty, and then we list in general what’s not covered. And we think we’re good. But when you read or hear about something like this, where you have to list all the parts, it’s concerning. I think we’re going to have to work with our associations to collectively find the best type of disclosure. And we’re going to have to be willing to sacrifice some things to get there. Up until the CFPB and discoveries like this one, we felt very secure in the way our products were priced. We stated that everything that is covered is written down and anything that is not written down isn’t covered. But if the CFPB is going to be looking for everything that’s not covered as well, that’s going to take a lot of reset. It will take a lot of effort on all of our parts to gather all of that data, and I would like the associations to get involved as well.”

“There’s so much emphasis in the industry right now on speeding up the time consumers spend in the F&I office,” DeCredico noted. “And this seems to be a little contradictory. It means you would have to take the time to go through and list every single exclusion that may cause a denial of claim. I think the area we should focus on most is the way we train and develop the F&I offices, to move away from very broad language like ‘bumper to bumper’ or ‘If the vehicle breaks down, everything is covered.’ I mean, those are the things we’ve all heard about for years and years, but it gets back to the issue of training.”

“So much in the contract these days is listing those exclusions,” added Macek. “You want to make sure you’re adequately disclosing to the customer where the coverage doesn’t apply and what circumstances or parts aren’t covered. So I think the tendency is to probably going to be to err on the side of caution to make sure that you are, in fact, providing as much information to the customer as possible.”

All in This Together

Meenan noted that the way the CFPB operates is very different from any other agency the industry has worked with before. In the past, he said, providers could sit down with their state insurance commissioner and have a chat, getting feedback to ensure both the products and the way they were sold was fair to everyone involved.

“But if you go to the CFPB, they’re not a provincial regulator,” he said. “They’re not interested in the survival of our industry. They do not feel there’s egg on their face if they destroy a particular segment or a particular industry. So you cannot get an answer even on basic issues. Their answer comes in the form of a simple investigative demand and anything you talk to them about is just giving them free discovery.”

He then asked the panel whether the best option would be to not only band together as an industry to find better solutions, but to ask dealers and the finance companies to join the effort as well. Amos was quick to agree.

“Right now, there are certain legal opinions that the CFPB doesn’t have regulation over our products and our industry,” he said. “Certainly they can go through the finance companies, but I think they’re eventually going to look at us. I think, as an industry, we’ve got to band together and prepare.”

“I think you’ll find the vast majority of dealers are very willing to get involved,” said Macek. “To me, they’re all very intuitive. The presence of the CFPB is impacting them already. So I think that, as an advisor to a dealer, it’s your responsibility to make sure they’re aware of what the issues are and what potential safeguards should be put in place to help them be successful in the future.”

“I think the dealers right now are very willing to listen,” Price agreed. “They are seeing what’s happening in the finance industry and they know it’s probably going to come down to F&I products at some point. Whether it’s the CFPB or the attorney general or the Department of Insurance, somebody is going to regulate us. If we do it proactively and give everyone in the automotive industry ideas on the best practices we can implement together — through our agents and through our associations — then we can avoid the catastrophe of one of us having to be the Ally Financial of the F&I segment and get our hand slapped the hardest so everybody else then takes action.”

“I know some people at Ally and their thought, when the CFPB came in, was that they were going to help the company be more compliant and provide information on what needed to be fixed. So Ally actually shared all their data, thinking there wasn’t going to be a fine,” said DeCredico. “They cooperated to the fullest and then got hit with a $98 million dollar fine. I think we have to come up with standards and best practices on our own. And I think we have to do it in conjunction with everyone else in the industry, because we certainly can’t do it with the CFPB.

“The whole idea of ‘govern or be governed’ — I think we have to try to govern ourselves as much as possible before the CFPB comes in and tells us how to do it,” DeCredico added. “And maybe if we do enough, and do it soon enough, and do it the right way, maybe they’ll go on to some other areas and not come after F&I.”

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Texas Compliance Summit to Feature ‘Your Responsibilities’ Panel


AUSTIN — Organizers of the upcoming Texas Compliance Summit have announced that Tariq Kamal, managing editor of Auto Dealer Today, will lead a panel discussion entitled “Leadership, Teamwork and Accountability” at the event, which will be held Nov. 16–17, 2015, at the Hilton Austin Airport Hotel.

“We are counting on Tariq and his panel to shift our focus from the theoretical aspects of front-end compliance to the practical application thereof,” said David Gesualdo, show chair and publisher of ADT and F&I and Showroom. “We expect a hard-hitting discussion that will result in useful strategies and advice.”

The panel, which falls under the “Your Responsibilities” portion of the agenda, will be staffed by dealership personnel and experts from the compliance and F&I training segments. Kamal helmed a similar panel at the Midwest Compliance Summit in April.

“In Chicago, the conversation ranged from state and federal regulations to econtracting, deal-jacket audits and the Better Business Bureau,” he said. “We will reconvene in November to deliver the compliance content Texas dealers need and demand.”

Registration for Texas Compliance Summit is open at the event’s website. Attendees who register on or before Oct. 26 will enjoy a $100 discount. For sponsorship and exhibition opportunities, contact Eric Gesualdo via email hidden; JavaScript is required or at 727-612-8826. More information is available on the event’s website.

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Compliance Summit Panel to Highlight ‘Your Responsibilities’


CHICAGO — Organizers of Compliance Summit have announced that a panel has been convened to discuss “Your Responsibilities” at the Midwest event, which will be held April 20–21, 2015, at the DoubleTree Chicago O’Hare in Rosemont, Ill.

“This section of the agenda cuts to the heart of the question Compliance Summit was designed to answer,” said David Gesualdo, show chair and publisher of Auto Dealer Monthly and F&I and Showroom magazines. “What responsibilities do dealers, compliance officers and F&I professionals actually bear when it comes to front-end compliance?”

The panel will include JC Cramer, who serves as compliance director for Detroit’s Feldman Auto Group and spoke at the inaugural Compliance Summit, in Miami, last November, as well as Bill Kelly, a partner in the Minnesota-based Automotive Development Group (ADG). Kelly will discuss the role agents can and should take in ensuring compliance standards are taught and reinforced at their dealerships. The panel will be moderated by Tariq Kamal, managing editor of Auto Dealer Monthly.

“Our plan is to drill down to the compliance issues Midwest dealers face on a daily basis,” Kamal said. “We will tackle those issues head-on in true Compliance Summit fashion.”

More information about Compliance Summit, including registration and travel information, is available at ComplianceSummit.com. For sponsorship and exhibition opportunities, contact Eric Gesualdo via email hidden; JavaScript is required or call 727-612-8826.

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