Profit Sharing: What Your Credit Union NEEDS to Know8 min read

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(Last Updated On: December 4, 2019)

Your CU is leaving money on the table!

Why do you offer a range of insurance products? In our discussions with clients over the years, these are the normal answers:

  • Offset CU risk
  • Protect members
  • Earn non-interest income

Does this seem about right to you?

In a classic situation, the insurance provider pays your CU a set fee based on production. And that’s about it. Maybe you can earn a bit more through interest income. But that’s separate from the provider.

Spilled Piggy Bank Coins

There’s income sitting on the table. And it can be substantial. As in, 300% increase or more, without any risk or changes to your current plans.

Interested?

Wonderful. Before diving into the deep end, let’s review what Profit Participation means, and how that translates to potential income growth across a range of your products.

Profit Sharing

Profit Sharing programs (also called “Retro” programs or “Profit Participation”) offer participating partners the opportunity to earn backend income without assuming any risk through a sharing of the program’s underwriting profits.

What does that mean?

Simply put, it means that if claims don’t exceed reserves, you get the difference in income. This is in addition to any upfront fees or commissions.

Let’s look at all the parts of an insurance premium. Keep in mind, the same categories apply for Vehicle Service Contracts and Debt Cancellation.

  • Reserves: Portion set aside for claims
  • Administration: Portion allocated to pay for the administrative services
  • Agent Fee/Commission: Upfront dollars paid to entity selling the insurance

Using the example below, how do these values mix?

  • Initial premium: $1850. That’s our starting point.
  • Administrator Fee: $350
  • CU Fee: $250
  • Reserves: $1250

The reserves are used as needed. In this case, $725 is allocated towards claims. If claims do not exceed this value, and the policy runs to expiration, $525 is available.

CU Certified VSC Price Distribution Pie Chart

Where does that money go? Without a profit-sharing agreement, it remains with the administrator.


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Pooled Risk…and Rewards

Remember, insurance is all about “pooling” risk. So, Profit Participation is based on the experience of the entire portfolio.

Talking about it gives you an academic understanding. Let’s create an example to see real dollars. Say your credit union sold 100 policies, at $2000 each, in a given year. You kept that trend up for 4 years. Here’s what happens:

Profit Sharing Chart - First Year

That’s right. Start adding up those $19,750 Profit Participation earnings each year. After 4 years, what does that mean for your institution? $79,000. And that’s above and beyond markup and interest income.

Make sure you read to the end. Imagine what your CFO would say if you didn’t!

Earned Premium

Most of your insurance products are sold along with loans. Here’s a few of the most common:

  • Credit insurance
  • GAP
  • Vehicle Service Contracts
  • Other debt cancellation products

Each of these span several years of coverage. So premiums are “earned” at each policy anniversary.

Let’s look again, assuming a $2000 policy. It’s a 4 year term. The reserve is $1450, meaning your institution “earns” $362.50 each year, per policy (assuming consistent claim experience).

But you sell policies every year, not just one. So what happens to earnings as more policies are sold year after year?

More Policies. More Income. Compounded.

We saw that one year of policy sales reaps long-term benefits. So how’s it look as you continue to sell?

With similar claim experience, you’re looking at Profit Participation doubling the next year. In our example, that’s $39,500.

Continue offering this product at a similar rate? Profits continue to increase:

Profit Sharing Chart - 4 Years

To be clear, those yearly Earned Profit Participation fields? That’s not cumulative income. Each is what you’d receive each year. With a total nearing $200,000.

Imagine what your credit union could do with this new source of revenue!

What if you switch to another provider?

Check your agreement. Some companies continue to pay Profit Participation for as long as the policies are active.

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Is this available on every insurance and debt cancellation program?

Unfortunately, no. Some insurances are not built to allow for this type of strategy.

GAP is a prime example. Claims are rising at nearly 30-50% year over year. So loss ratios are equally high. There’s no overhead for Profit Participation at current rates or claim increases.

Reserves are put towards buffering rate increases and helping preserve your credit union’s sales volume.

Is Profit Participation always 100%?

Three Chart Bars with Red Wavy Line

No. It depends on the formula the company uses. Here’s three approaches we see throughout the industry:

  1. Scale: Starting at 25% and range up to 100%, based on production
  2. Loss-ratio minimum: Reserves incurred versus claims
  3. Bonuses: Upfront or by reaching performance tiers

Is Profit Participation new?

It’s a tale as old as time! Ok, maybe not that long. Regardless, Profit Participation has decades of proven experience.

Auto dealers love Profit Participation. They use it with their Vehicle Service Contract programs and other ancillary products. And that’s going back several decades.

In fact, your credit union may already have it! Your credit insurance or debt cancellation portfolios are most common for Profit Participation. Ask your CFO. How would you know?

If your institution’s portfolio has had positive claims experience, you’ll see a very large check around February each year.

So if it’s been around for years, what’s new?

Profit Participation is now available to you on more insurance programs, including Vehicle Service Contracts. However, it’s not marketed to exist by major industry insurance providers (at least as of this article’s Last Updated Date). So, due diligence is up to you.

We’ll get you started: Best VSC Providers In 2019

A Valuable, If Uphill, Mission

Unlike the auto dealer business, most credit union industry providers base their entire business model on retaining those surplus reserves. That means not paying out any Profit Participation.

For them, change is costly.

Brown Egg Carton with One White Egg
Time to “hatch” a new way of doing business, eh?

They’re not “bad guys” or anything; it’s just a totally different strategy from how they’re used to operating.

So how do you get the info needed to see if Profit Sharing even makes sense for your institution?

Great question. Remember, it’s your right to request and receive information on the performance of your credit union’s portfolio…even if it makes your current provider uncomfortable.

Once you have that data and had an opportunity to analyze, you will be in a much better position. From there, you may decide to re-negotiate with your current provider. Or, you may decide to research products from other companies.

It’s all about finding the greatest benefits for your credit union and members.

The Provider Inquiry: Where to start?

It begins with Loss Ratio (LR). Is your LR below 100%? If so, that may signal there are Earned Premium Reserves which could be available for payout. In other words, money on the table!

Conversely, Loss Ratios above 100% could indicate one of two possibilities:

  • Unusual economic factors
  • Issues with your credit union’s sales penetration

Both of these situations can lead to a premium increase.

The Loss Ratio report is your first step to learn how much your administrator is receiving. It also empowers you, the seller (or agent), with an estimated amount your credit union is missing out.

Next, Request Statements

Calculator with Pen and Paper Statement

Check your year-end statements. They should include, at a minimum, your credit union’s:

  • Sold contracts
  • Paid claims
  • Loss ratio

If you do not have, it helps to request these from your current vendor. We make it easy with a Vendor Request Sheet, which includes a pre-made list for any insurance program:

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Moving Forward

Now that you have all the data, what’s next?

Dirt Road into Horizon

We’ll assume the program has no issues with your members. From there, it’s important to ensure the service provides the best return for your institution.

Full honesty: It’s possible your current vendor may not offer a profit sharing arrangement. If that’s the case, you’ll probably want to see your other options in the market. That normally includes submitting a whole bunch of RFPs to a range of providers. Cool. Just hold your horses.

Your time is valuable. Before you dig in and prepare all those RFPs (and schedule time away for meetings), take a look at our Learning Library for in-depth information on the product and providers. We cover:

Our unbiased library will help you get the full picture, pros and cons, how-tos, and even provider lists to give you the gift of the knowledge during any future negotiations.

On that note, let’s make it even easier to find out who your provider options are:

While we offer these products as well, we get they may not be a fit for every credit union. These lists are for your convenience. Should you wish to include us in your decision-making process, we can share whatever information you may need.

The easiest first step is a short conference call so we can learn about your goals and challenges. 15 minutes and you pick the time!

Profits For Everyone

It’s all about your members. They’re trusting you to provide the greatest value on the protection products they need. Since you’re making them available at a lower cost than other sources, members are happy their hard-earned cash is going to good use.

Can you do more? Program administrators reap the profits from your offerings. Wouldn’t it be great if your members could as well? Profit Participation helps you better achieve your mission.

So, which product will you research first?