CFC Reinsurance: How Controlled Foreign Corporation Programs Work
A Controlled Foreign Corporation (CFC) reinsurance program is one of the most established and commonly used reinsurance structures in the automotive industry. When structured and managed correctly, a CFC can provide dealerships with long-term profit participation, balance sheet control, and investment flexibility. However, like any reinsurance structure, it is not universally appropriate for every dealer and can vary meaningfully based on administrator, product mix, and investment strategy.
This page is designed to explain how CFC reinsurance works, which dealers should consider it, and the key structural and financial factors that impact performance.
What Is a CFC Reinsurance Program?
A Controlled Foreign Corporation CFC reinsurance program allows a dealership to reinsure a portion of its F&I product premiums through a reinsurance company that the dealer owns or controls. These programs are commonly domiciled in one of two locations. The first is an offshore domicile most commonly the Turks and Caicos Islands. The second is a tribal domicile, such as the Delaware Tribe, which operates as a sovereign entity within the United States.
Offshore domiciles like Turks and Caicos have long been used for captive and reinsurance programs due to established insurance regulations and familiarity within the automotive reinsurance space. Tribal domiciles are structured under sovereign tribal authority and are treated as domestic for federal tax purposes while operating under a separate regulatory framework. While both structures function similarly from an operational standpoint, the domicile can influence tax treatment, regulatory oversight, and administrative execution.
In a CFC structure, the dealership cedes a portion of eligible product premiums to the reinsurance company. Claims are administered by the program administrator in accordance with the underlying insurance contract. Profits accumulate within the reinsurance company over time, and the dealer retains underwriting and investment risk within defined parameters.
Which Dealers Should Consider a CFC Reinsurance Program
CFC reinsurance programs are typically best suited for dealerships that have achieved consistent volume and demonstrate disciplined F&I operations.
Typical Dealer Profile
Dealers that are strong candidates for a CFC program generally have steady monthly F&I production, consistent product penetration, a long-term ownership mindset, and a willingness to engage professional tax, legal, and accounting support. These dealers often seek greater control and visibility into their reinsurance economics rather than short-term profit distribution.
Dealerships with limited volume, inconsistent underwriting, or highly volatile performance may benefit from alternative structures until scale and stability are achieved.
Ceding Limits and Premium Flow
In a CFC reinsurance program, the amount of premium that can be ceded into the reinsurance company is capped at $2.85 million per year. This annual cap represents the maximum net premium the reinsurance company can accept while maintaining the intended tax treatment commonly used in traditional CFC structures. Once the $2.85 million limit is reached, any additional eligible premium written during that year is no longer ceded into the CFC and is handled outside of the reinsured structure based on the program rules.
For dealers whose production is approaching or expected to exceed the annual cap, planning becomes critical. When premium volume outgrows the $2.85 million limit, the traditional CFC structure can begin to restrict premium flow and reduce long term effectiveness if no adjustments are made. At this point, dealers typically evaluate alternative structural options to accommodate continued growth.
One option is the use of multiple CFC reinsurance companies. This approach can allow additional premium to be reinsured while preserving a familiar structure, but it also increases administrative complexity, compliance requirements, and ongoing operating costs. Another option is transitioning to a Super CFC structure, which is designed for higher volume dealers and allows for greater premium capacity while maintaining reinsurance economics and long term planning flexibility. A third alternative is a Dealer Owned Warranty Company, or DOWC, which provides expanded premium capacity and greater underwriting control, but also introduces additional regulatory, capitalization, and risk considerations.
Understanding the $2.85 million annual ceding limit and the options available when that limit is approached is essential for building a reinsurance strategy that can scale with a dealership’s growth rather than constrain it.
Investment of Unearned Premium
In a CFC reinsurance program, investment flexibility is largely driven by how the administrator structures and manages the accounts holding reinsurance funds. Most programs separate funds into two primary accounts, commonly referred to as the A account and the B account, each with distinct purposes and investment constraints.
The A account is generally associated with unearned premium and required reserve balances. Because these funds are intended to support future claims obligations, most traditional CFC programs limit A account investments to conservative strategies focused on liquidity and capital preservation. This typically includes low risk fixed income instruments and cash equivalents. As a result, investment returns in the A account have historically been modest, particularly in the early years of a program when unearned premium balances are highest.
Newer CFC program models have introduced additional flexibility within the A account. Some administrators now allow a broader range of conservative investment options on unearned premium, provided reserve adequacy and liquidity requirements are maintained. These enhanced structures can allow investment income to accumulate more quickly compared to traditional models, which can materially impact long term program performance. Administrators that offer this approach typically work with a defined group of investment brokers who understand the regulatory, actuarial, and liquidity constraints specific to reinsurance companies and are experienced in managing capital within those parameters.
The B account generally represents earned premium or surplus funds that exceed required reserve levels. Across administrators, the B account allows significantly more flexible investment strategies because these funds are not directly tied to unearned premium obligations. Investment options in the B account often include a broader mix of fixed income instruments and other approved strategies, depending on the program design and dealer risk tolerance. Because of this flexibility, the B account is often where more meaningful investment growth occurs over time.
For dealers evaluating a CFC reinsurance program, it is important to understand not only what investment options exist, but how funds transition between the A and B accounts, when investment flexibility increases, and who controls investment decisions. The ability for investment income to compound earlier in the life of a program can be a meaningful differentiator between administrators, making investment structure an important consideration alongside fees, claims handling, and reporting transparency.
Variability by Administrator
While the core concept of a CFC reinsurance program is consistent, the way it is executed can vary significantly by administrator. These differences often have a greater impact on long term results than the structure itself. Dealers evaluating a CFC should understand that not all administrators approach underwriting, reserving, reporting, and program management the same way.
One key area of variability is fee structure. Administrative fees, ceding fees, claims adjudication costs, and ancillary charges may be bundled or separated depending on the administrator. How and when these fees are applied can materially affect net premium flowing into the reinsurance company and overall program performance.
Claims handling is another critical differentiator. Administrators vary in how claims are adjudicated, how reserves are established, and how aggressively claims are paid or managed. These practices directly influence loss ratios and the long term profitability of the CFC. Dealers should evaluate claims philosophy and historical performance rather than assuming all administrators manage claims similarly.
Reporting transparency also differs widely. Some administrators provide detailed, easy to understand financial reporting that clearly shows premium flow, reserves, claims activity, and investment performance. Others offer limited or delayed reporting, making it difficult for dealers to fully understand how their program is performing. Consistent, transparent reporting is essential for proper oversight and informed decision making.
Investment oversight and governance can also vary by administrator. Differences may include who controls investment decisions, which brokers are approved, how often portfolios are reviewed, and how risk is managed within both the A and B accounts. These factors influence not only returns but also liquidity and long term stability.
Because of these differences, selecting a CFC administrator should involve more than a fee comparison. Operational execution, transparency, experience, and long term support all play a role in determining whether a CFC program delivers on its intended value.
Key Considerations and Ongoing Oversight
A CFC reinsurance program requires ongoing attention and oversight to perform as intended. While the structure itself can provide long term benefits, results are driven by how the program is managed over time. Dealers should approach CFC reinsurance as an active financial strategy rather than a passive arrangement.
Regular review of financial reporting is essential. Dealers should receive clear and timely statements that outline premium flow, reserve balances, claims activity, fee application, and investment performance. Understanding how these components interact allows dealers to identify trends early and address potential issues before they materially impact results.
Claims performance and reserve adequacy should be monitored consistently. Loss ratios, claim frequency, and reserve development all influence the long term profitability of the CFC. Dealers should understand how reserves are established, how they are adjusted over time, and how claims handling practices affect retained earnings.
Product mix discipline is another important consideration. Not all F and I products carry the same risk profile, and including volatile products can increase variability in results. Dealers should understand which products are included in the reinsurance program and how changes in product mix affect overall performance.
Fee structure should be reviewed on an ongoing basis. Administrative fees, ceding fees, claims adjudication costs, and other charges can change over time or have a greater impact as volume grows. Dealers should confirm how fees are calculated, how they are applied, and whether they remain aligned with program performance.
Runoff and exit planning should be considered before it is needed. Dealers should understand how the CFC is managed if production slows, ownership changes, or the dealership exits the program. Clear runoff support and defined exit processes help protect accumulated value within the reinsurance company.
Finally, coordination with qualified tax, legal, and accounting professionals is critical. A CFC reinsurance program intersects with broader dealership financial and tax planning, and professional guidance helps ensure compliance and alignment with long term objectives.
Effective oversight is not optional. It is a key component of a successful CFC reinsurance strategy and an important factor in determining whether the structure delivers sustainable long term value.
Is a CFC Reinsurance Program the Right Fit for Your Dealership
A CFC reinsurance program can be a powerful long term tool when it is aligned with the right dealership profile, properly structured, and actively managed. For dealers with consistent volume, disciplined F and I operations, and a long-term ownership mindset, a CFC can provide meaningful participation in underwriting profit and investment income while supporting broader wealth-building objectives.
At the same time, a CFC is not a one size fits all solution. Ceding limits, investment constraints, administrator execution, and ongoing oversight requirements all influence whether the structure will deliver its intended value. Dealers approaching or exceeding the $2.85 million annual cap must also consider how the program will scale as the dealership grows and whether alternative structures such as multiple CFCs, Super CFC programs, or a Dealer-Owned Warranty Company are more appropriate.
The most important step is education. Understanding how CFC reinsurance works, how administrators differ, and how the structure fits within your dealership’s financial strategy allows you to make informed decisions rather than reactive ones. A well-designed reinsurance strategy should support growth, not limit it.
If you are evaluating reinsurance for the first time, reviewing an existing program, or planning for the next stage of growth, clarity should come before commitment. Taking the time to understand the structure today can materially impact your dealership’s long term financial outcomes.
Common Questions About CFC Reinsurance Programs
What is the annual ceding limit for a CFC reinsurance program?
In a traditional CFC reinsurance structure, the amount of premium that can be ceded into the reinsurance company is capped at $2.85 million per year. This limit applies to the total net premium ceded during the year and is an important planning consideration for dealerships with higher F and I volume.
Is the $2.85 million cap based on gross or net premium?
The $2.85 million cap is typically calculated on a net premium basis after applicable administrative fees and program costs are deducted. Dealers should confirm how their administrator defines and tracks net premium when evaluating ceding capacity.
What happens if a dealership exceeds the CFC premium cap?
Once the $2.85 million annual cap is reached, additional eligible premium is generally not ceded into the CFC for that year. Dealers approaching or exceeding this limit should evaluate alternative structures such as multiple CFC companies, a Super CFC program, or a Dealer-Owned Warranty Company to support continued growth.
How are the A account and B account different in a CFC program?
The A account typically holds unearned premium and required reserves and is subject to more conservative investment constraints. The B account generally represents earned premium or surplus funds and allows for significantly more flexible investment strategies across administrators.
Can unearned premium be invested in a CFC reinsurance program?
In most traditional CFC programs, investment options for unearned premium in the A account are limited and conservative. Some newer program models allow greater investment flexibility within the A account, provided reserve and liquidity requirements are maintained. Investment terms vary by administrator and should be reviewed carefully.
How do administrators differ in CFC reinsurance programs?
Administrators differ in fee structure, claims handling, reserve methodology, reporting transparency, investment oversight, and long term support. These differences can materially affect program performance, making administrator selection as important as the structure itself.
When should a dealer consider a Super CFC or DOWC?
Dealers should consider alternative structures when reinsured premiums approach or exceed the $2.85 million annual cap, or when growth plans exceed the capacity of a traditional CFC. Super CFC and DOWC structures are designed to accommodate higher volume and different risk profiles.
Is a CFC reinsurance program right for every dealership?
No. A CFC reinsurance program is best suited for dealerships with consistent volume, disciplined F and I operations, and a long term ownership mindset. Dealers with limited volume or highly variable performance may benefit from alternative structures until they are positioned to support a CFC.