How Borrowing Against Reinsurance Differs From Pulling Funds Out
- Michael Aufmuth
- Jan 9
- 9 min read
One of the most common frustrations I hear from dealers involved in reinsurance has nothing to do with product performance or structure selection. It usually comes down to expectations. Dealers review statements, see underwriting profit, and still feel like the money is out of reach. When that happens, the assumption is often that something is wrong with the program.
In most cases, it is not.
Reinsurance is not commission income. It is insurance finance. Once that distinction is clearly understood, reserves, timing, and capital access start to make sense. This article is designed to explain why reserves exist, why distributions take time, and how certain reinsurance structures allow dealers to access liquidity responsibly without pulling money out of the program or undermining long term value.
Why Reinsurance Reserves Exist and Why Timing Matters
Reinsurance reserves exist because claims do not occur all at once. Premium is collected upfront, but claims develop over time. Some claims surface quickly. Others emerge years later. Reserves ensure the program can pay future claims while remaining solvent and credible.
This is the foundational difference between reinsurance and traditional F&I income. A commission is transactional. Reinsurance is actuarial. It is designed to mature.
Dealers often struggle when they see profitability on paper but limited access to cash. That tension is usually a timing issue, not a performance issue. A reinsurance portfolio needs time to establish predictable claims behavior before surplus can be confidently released.
Timing is not a delay tactic. It is the mechanism that protects long term stability.
The Difference Between Accounting Profit and Accessible Capital
One of the biggest misconceptions I see is the belief that profit automatically equals cash.
A reinsurance program can show underwriting profit while still holding substantial reserves. That is not a contradiction. It is how insurance based financial models work. Profit measures performance. Liquidity measures availability.
This distinction is critical. Dealers who focus only on when distributions occur often miss the bigger picture. The more important questions are how reserves are calculated, how surplus is defined, and what conditions must exist before capital can be accessed responsibly.
When dealers understand this difference, reinsurance stops feeling like delayed gratification and starts functioning like a balance sheet strategy.
Understanding A Account and B Account Reserves in Reinsurance
Another area where confusion often starts is how reserves are categorized inside a reinsurance program. In most dealer reinsurance structures, reserves are commonly discussed in terms of two buckets, often referred to as the A Account and the B Account.
The A Account is generally associated with unearned premium and unearned risk. These reserves are tied to contracts that are still early in their coverage period, where a meaningful portion of risk has not yet run off. Because future claims are still uncertain, A Account reserves are primarily designed to protect the program and support claim paying capacity.
The B Account is typically associated with earned premium. As contracts mature and risk is earned over time, underwriting results transition out of the unearned category. The B Account reflects earned results after claims and expenses, subject to reserve adequacy and liquidity requirements. This is where surplus typically begins to accumulate as a program stabilizes.
While A Account reserves are generally more restricted than B Account balances, some administrators do allow limited borrowing against A Account reserves under specific conditions. When permitted, the amount that can be accessed is typically capped and tied directly to the overall performance of the reinsurance portfolio. As claims experience stabilizes and reserve adequacy strengthens, the percentage available for borrowing may increase. Conversely, access may be reduced or suspended if performance deteriorates.
This distinction is important. Borrowing against A Account reserves is not automatic, universal, or static. It is a performance based decision governed by the structure of the program, the administrator’s rules, reserve strength, and liquidity requirements. In contrast, discussions around distributions and broader leverage more commonly apply to earned surplus reflected in the B Account.
Understanding how A and B Accounts function together helps align expectations and prevents assumptions that all reserve balances are treated the same way.
Retro Profit Sharing Versus Captive Style Reinsurance
Before talking about leverage, structure has to be clearly defined.
In a retro profit sharing program, the dealer typically participates through a contractual agreement. The administrator or obligor controls reserves, investments, and underwriting decisions. The dealer shares in profits based on performance but does not own the reinsurance entity or its balance sheet.
Because of that, retro programs usually do not provide a mechanism for borrowing against reserves. There is no owned entity from which to lend. Liquidity is generally limited to distributions under the terms of the agreement.
Captive reinsurance and dealer owned structures operate differently. In those models, underwriting profit accumulates inside an entity the dealer owns or controls. That surplus becomes part of the entity’s balance sheet and can be invested according to an approved investment policy.
This distinction matters. The ability to leverage reserves typically exists only in structures where the dealer has balance sheet control.
How Dealers Can Leverage Reinsurance Without Pulling Money Out
When dealers say they want to borrow from reinsurance, what they are really asking for is liquidity without triggering a distribution, without eroding the program, and without giving up long term compounding.
In properly structured captive environments, liquidity can sometimes be achieved through a documented loan from the reinsurance entity to the dealer or an affiliated operating company. The reinsurance entity treats the loan as an investment and earns interest on the note.
The money is not being pulled out of the program. It remains on the reinsurance balance sheet as a receivable. The dealer gains access to capital. The reinsurance entity earns interest income. When the loan is repaid, both principal and interest flow back into the reinsurance entity.
When done correctly, the capital stays inside the system and continues to work.
How Borrowing Against Reinsurance Differs From Pulling Funds Out
This is an important distinction that is often overlooked.
When funds are distributed from a reinsurance account as income, those distributions are typically taxable in the year they are received. Once the funds leave the reinsurance structure as a distribution, the tax consequence is triggered.
Borrowing against reinsurance works differently. When a properly structured reinsurance entity makes a documented loan to the dealer or an affiliated entity, the transaction is treated as a loan, not income. Because the funds are expected to be repaid under defined terms, the loan itself does not generally create the same immediate tax liability that a distribution would.
The reinsurance entity records the loan as an asset. The dealer records a corresponding obligation. Interest is paid back into the reinsurance entity over time, where it becomes part of the program’s investment return.
This distinction allows dealers to access liquidity without permanently removing capital from the reinsurance program and without triggering the same tax liability that would exist if funds were pulled directly from the account.
This treatment depends on proper structure, documentation, and execution. Loans must be real loans, structured at arm’s length, supported by repayment terms, and compliant with the rules governing the reinsurance entity.
The Rules That Make Leverage Work and the Rules That Break It
Leverage is not a shortcut. It is a regulated related party transaction that must be handled carefully.
Not all reinsurance entities allow loans to affiliates. Structure, domicile, and governing documents matter. Some programs permit loans with approval. Others prohibit them entirely.
Loan terms matter as well. Interest rates must be defensible. Repayment schedules must be reasonable. Documentation must reflect a real transaction, not an informal transfer of funds.
Reserve adequacy and liquidity are non negotiable. Required capital and reserves cannot be impaired. The reinsurance entity must remain capable of paying claims under all reasonable scenarios.
When these rules are ignored, leverage becomes a liability. When they are respected, leverage becomes a tool.
When Leverage Makes Sense and When It Does Not
I view leverage as a second phase strategy. It is not something that should be considered early in a program’s life.
Leverage can make sense when a portfolio is mature, reserves are stable, claims performance is predictable, and surplus has accumulated beyond what is required for solvency. It can also make sense when the capital is being used to support long term objectives that strengthen the dealership.
Leverage does not make sense when reserves are thin, claims are still developing, or the loan would compromise the program’s ability to perform. Borrowing simply because distributions feel slow is usually a sign of unrealistic expectations, not a structural problem.
Why Paying Interest Back Into Reinsurance Changes the Math
The most overlooked advantage of this strategy is not access to cash. It is what happens to the interest.
When a dealer borrows externally, interest expense leaves the business. When a dealer borrows from a properly governed reinsurance entity, the interest paid becomes investment income for that entity.
Over time, that interest contributes to surplus growth, retained earnings, and long term enterprise value. The reinsurance program stops being a passive profit share and becomes an active financial asset.
This is where reinsurance shifts from concept to strategy.
How Dealers Should Think About Reserves as a Strategic Asset
Reserves are not trapped money. They are committed capital.
Dealers who understand this stop measuring success solely by distribution timing. They focus on underwriting discipline, transparency, and long term performance. Reserves are protected first. Advanced strategies are layered in only when the foundation is strong.
The most successful reinsurance programs I see are managed intentionally. Product mix is controlled. Claims performance is monitored. Reporting is reviewed regularly. Leverage is considered thoughtfully, not rushed.
Using Reinsurance Reserves as a Long Term Liquidity Strategy
Reinsurance works best when it is approached with patience and clarity.
Reserves exist to protect the program. Timing exists to allow maturity. Leverage exists only in the right structures, under the right conditions, with the right governance.
For dealers who take the time to understand these mechanics, reinsurance becomes more than deferred income. It becomes a strategic asset that supports liquidity, growth, and long term control without undermining the integrity of the program.
This is not available to every dealer and it is not appropriate for every structure. But when designed intentionally and managed responsibly, it represents one of the most underutilized advantages of a mature dealer reinsurance strategy.
Dealers who want to understand whether their current program supports this level of flexibility benefit from transparent reporting and side by side structural analysis. That clarity is what allows reinsurance to move from theory to execution and from participation to strategy.
Frequently Asked Questions About Reinsurance Reserves and Borrowing
What are reinsurance reserves in a dealer reinsurance program
Reinsurance reserves are funds set aside to pay future claims on contracts sold by the dealership. Because claims develop over time, reserves are used to protect solvency and ensure the program can meet its obligations as the portfolio matures.
What is the difference between A Account and B Account reserves
A Account reserves are typically tied to unearned premium and unearned risk on contracts that are still early in their coverage period. These reserves exist to protect against future claims where risk has not yet fully developed.
B Account reserves are generally tied to earned premium and reflect underwriting results after claims and expenses as contracts mature. Surplus typically accumulates in the B Account over time as performance becomes predictable.
Why are A Account reserves usually more restricted
A Account reserves are more restricted because they support unearned risk. Since future claims are still uncertain, these reserves are primarily designed to protect the program’s ability to pay claims. Restrictions help ensure long term stability and solvency.
Can a dealer borrow against A Account reserves
In some programs, yes. Certain administrators allow limited borrowing against A Account reserves when performance, reserve adequacy, and liquidity support it. Access is typically capped and varies based on how the reinsurance portfolio is performing. Borrowing against A Account reserves is more restricted than borrowing against earned surplus and is not available in all structures.
Can a dealer borrow against B Account reserves
Borrowing discussions more commonly apply to earned surplus reflected in the B Account. When permitted by structure and governing rules, B Account surplus may support loans or advances as long as reserves remain adequate and liquidity is maintained.
How is the borrowing percentage determined
The percentage that can be borrowed is typically performance based. Strong claims experience, stable reserve development, and consistent profitability may support higher borrowing capacity. Increased claims activity, reserve pressure, or portfolio volatility can reduce or eliminate access. The percentage is not fixed and can change over time.
How is borrowing different from taking a distribution
A distribution is generally treated as income and can create a tax liability in the year it is received. Borrowing, when properly structured, is treated as a loan that is expected to be repaid. Because the funds are not taken out as income, borrowing does not generally create the same immediate tax outcome as pulling money directly from the account as a distribution.
What happens to the interest when a dealer borrows from reinsurance
When a loan is structured correctly, the dealer pays interest back to the reinsurance entity. That interest becomes investment income inside the program and contributes to surplus growth, retained earnings, and long term value rather than leaving the dealer ecosystem.
What rules must be followed for reinsurance borrowing to be legitimate
Borrowing must be structured as a real loan with documented terms, market based interest, and a defined repayment schedule. The transaction must comply with the rules governing the reinsurance entity and cannot impair required reserves or liquidity. Governance and compliance are critical.
When does leveraging reinsurance reserves make sense
Leverage can make sense when the portfolio is mature, reserves are stable, claims performance is predictable, and surplus has accumulated beyond what is required for protection. It should support long term objectives and not compromise the integrity of the program.
When should a dealer avoid borrowing against reinsurance
Borrowing should be avoided when the portfolio is immature, reserves are thin, claims are still developing, or access to capital would strain liquidity. If the primary motivation is frustration with timing, the better solution is usually education, transparency, or execution improvements rather than leverage.