Extended Service Plans: Getting Down to Business

By: Jeff Hatch

June 10, 2015

As a retailer, you know that extended service or warranty plans are a natural product offering for your business. They’re both comforting to consumers and profitable from a business perspective. But how much do you know about how your warranty programs work? Who are the players involved and who’s responsible for the various elements in fulfilling the plan? What’s your return on investment? Understanding the life cycle of your warranty plans not only impacts your customers and profit margins, but also your brand.
 
Start Here
Filling in the family tree of a warranty program can be a confusing process. Who’s responsible for what, when and for how much can be seen as a burden that many retailers choose to disregard. But, unless you know the answers, you’re leaving your store and customers at risk. 
 
An easy starting point is uncovering who the insurance company is that’s covering your plans. The insurance company, or underwriter, is the one who insures claims liabilities from the warranty contracts. It’s important to look for insurance companies that are well-managed and well-capitalized because they are truly the foundation of your plans. This is the company that you’re building your reputation on when claims need fulfilling, even if your business fails. This is the group that needs to be trusted, vested and insured so you and your customers can have peace of mind. 
 
Next Steps
A service contract provider is the company that is legally and financially obligated to repair or replace the customer’s covered product. This company is your business partner. They create and administer customized extended service plans on your behalf to meet your operations’ needs, customer expectations or product requirements, and in return, collect a fee for their services. Full disclosure of costs and margins is important because once plans are agreed upon with the service contract provider your store is able to mark them up accordingly or offer them to consumers at recommended retail prices. 
 
If you’re not sure what you’re paying for, you have every right to ask your service contract provider a few questions to level the playing field: 
 
1. How is your cost divided between insurance and administration? 
2. What is each entity’s profit margin?
3. What is the program loss ratio, both overall and by product? If your loss ratio is very low it should give you the opportunity to lower prices to sell more ESPs, be more competitive or collect more profits and put them in your pocket.
4. Am I going to receive all the information I need on a regular basis to ensure I am getting the best price and product compared to the market?
5. Do you participate in a profit sharing program with your insurer? 
6. Is my program compliant to protect my company’s brand reputation? Have all statutory compliance and filings been addressed? 
7. If there is an insurer and/or re-insurer involved, what is the financial strength rating of each and who is your contact at the insurer? 
 
The service contract provider and warranty administrator (or third party administrator) are usually the same organization. As a customer facing group, it’s critically important that your store has access to a contact person and your customers find it easy to work with this organization. They are also responsible for training your sales representatives on the ins and outs of selling warranty plans and how to facilitate a claim. 
 
Since you’re paying the administrator a fee, you want to align yourself with well-respected companies that work hard to earn trust and deliver on expectations — for your store and your customers. Working with administrators that allow communication with all parties, including the underwriter, keeps the relationship in check and ensures plans operate smoothly and adhere to specific terms and conditions. Additionally, administrators contract with repair facilities to repair or replace covered products, so easy access and open lines of communication are essential in this relationship to ensure the parties involved — you and your customers — get what they’re paying for.  
 
The Customer’s Role
The service contract is an agreement between the service contract provider and your customer. The service contract terms and conditions may state that for service or to report a claim, the customer should call a separate number to contact the warranty administrator. For your store, keeping the administration and underwriting under one umbrella provides a hassle-free arrangement that ensures warranty plans deliver positive results for customers throughout the life of the plans.
 
Is Your Plan Working?
While creating an effective warranty program certainly takes a little work, becoming educated about the process and asking the right questions to ensure you’re partnering with the right service contract provider is critical to the success of your business. Bottom line, knowing who the extended warranty players are and how they impact your business can mean the difference in profit and loss — of revenue and customers. 

Filed Under: administrator, contract, customer, extended, insurance, plan, program, provider, service, warranty

Branding of Product Protection Programs

By: Jeff Hatch

January 06, 2015

A recent trend in the service contract industry is the emergence of administrators attempting to create a strong brand identity with consumers. Many administrators are working diligently to create brand recognition for their organizations by branding the protection offerings they sell through retail partners. The question is often asked, "Is this new approach in the best interest of the retailers?"

AMT Warranty and its subsidiary Warrantech's view is that the recent "brand building" business models employed by many administrators in the industry serve only to benefit the administrators and not their retail partners. This belief is derived from our core philosophy about the purpose of service contract programs. It's indisputable that service contract programs should provide important incremental revenue for retailers. However, our view is that a well-designed and maintained service contract program should drive customer loyalty and retention for the retailers selling the service contracts.

We view each service contract claim as an opportunity to enhance the trust between a customer and our retail partner who sold the underlying product and associated service contract. Product failures happen. When they do, customers feel a level of frustration. While it's true that the retailer is generally not the manufacturer of the product, customers often associate the product issue with the retailer who sold it to them. We believe that the solution to the product failure is best provided through a retailer-branded service contract in order to reestablish the trust that may have been diminished by the product failure. As a result of the service contract, retailers (through their administrator) are given the opportunity to engage in a highly personalized marketing campaign with a customer who at that moment may be their biggest detractor. We view this as micromarketing with macro effects.

In the emerging administrator-centric model, the solution is provided to the customer under the administrator's brand. The positive customer interaction and goodwill generated from resolving the customer's issue serves only to enhance the value of the provider's brand. That goodwill is retained by the provider, even after their relationship with the provider has ended. Even more problematic is that the administrator may also be marketing service contracts directly to consumers, including the customers of their retail partners. In essence, by agreeing to market service contracts under the administrator's brand, retailers could be promoting a competitor's offering to their customers. Moreover, the retailer has established a new relationship between their customers and a potential competitor. We feel that the resulting consequences for permitting administrator-branded service contract programs will have long-term financial implications for retailers as the strength of their administrator's brands increase in the eyes of the retailers' customers. 

While the desire of administrators to build their own brand value is understandable, retailers should be wary of the consequences.

Filed Under: administrator, brand, branding, contract, customer, product, program, protection, retailer, service

How Well Do You Know Your Service Plan/Warranty Administrator?

By: Jeff Hatch

December 23, 2014

Service contracts and extended warranties can be a great source of revenue for retailers, manufacturers and distributors. And their use as a customer satisfaction and retention tool can never be overstated. But what happens if your administrator ceases operations or is otherwise unable to service your business?

To be an approved administrator, certain licenses must be obtained along with proof of financial stability. Most administrators in the marketplace satisfy this last requirement by securing a contractual liability insurance policy (“CLP”) issued from an insurance company. This CLP requires the insurance company to “stand in” for the administrator in the event the obligations to the consumer have not been met. But what happens if the insurance company cancels the administrator, cannot provide administrative capabilities or ceases operations?

While the name of the administrator, and often the insurer, is listed in the service contract, when the customer seeks payment of a claim or a return of their funds, and the administrator and/or insurer no longer answer their phones, where does the customer turn?

Throughout the years, there have been numerous instances where either the administrator and/or the insurer of a service contract program have gone out of business or otherwise ceased operations. When this happens, your customers may not get their claims paid or their refunds processed and YOU will be their target of ire and will often be compelled to make good to the customer out of your own pocket.  How do you prevent this?

At AMT Warranty and its subsidiary Warrantech, we believe it is critical that you know and understand the capabilities and financial wherewithal of your administrator and your insurer. Conducting due diligence and asking the right questions can make all the difference between a service plan program that provides you with revenue and customer satisfaction and one that is a customer service and financial nightmare.

To ensure your service contract providers will be there when your customers need them most, we believe you should be asking the following:

• How long have they been in business?
• What is the experience and background of their management team?
• What is the size of their business?
• What is the ownership structure of their business?
• What is their Better Business Bureau rating?
• Who is their insurer?
• How many insurers have they had over the past 10 years?
• Are they and the insurer under common ownership?
• What is the insurance structure of the CLP (e.g., is the insurance company standing in on the “first dollar” of risk or are they simply providing an excess of loss policy)?
• If your administrator is using an “excess of loss policy,” is your administrator reserving sufficient monies needed for the potential risk not covered under the insurer provided policy?
• How long has their insurance company been in business?
• What is their financial size and A.M. Best rating?
• Are the respective companies compliant with SOX, PCI, SSAE 16, etc.?
• Do they have audited or public financials?
• Have you visited their facilities?
• Are they outsourcing any critical functions?
• Are you doing reference checks?

A well designed and maintained service contract is only possible if all of the parties to the transaction are fully capable of performing their various roles and can weather periodic or irregular changes to their business model or performance, especially if your provider is not vertically integrated with the insurance company.

Filed Under: administrator, business, claims, contract, financials, insurer, manufacturers, retailers, service, warranty

Extended Service Plans: What’s Behind All The Fine Print?

By: Jeff Hatch

December 03, 2014

Using a single-source provider for underwriting and administration offers gains in profit and service.

The real question isn't what's behind the fine print, but rather who is behind the fine print of an extended service plan. In today's economic climate, retailers need to be diligent in determining who can financially back and service their products with plans that don't negatively impact bottom line results or customer relations. While some retailers prefer to act as their own administrator for service, the overhead costs and time required to facilitate work orders, customer service and repairs can often lead to eroding profits and dissatisfied customers. For retailers that opt to rely on an outside provider for administration or underwriting, it can expose your business and customers to financial risks and service levels that don't align with your business goals.

As a retailer, customers trust that you'll stand behind the products you sell with service plans they can rely on. Now, more than ever, retailers need to select partners that not only provide sound financial backing but also the service required to assist when customers need it most. By working with a single-source provider for underwriting and administration of extended service plans, retailers can focus on sales knowing that the money saved and service gained from a customized program can deliver profitable margins and elevated service that keep customers coming back.

Understand the Plan

Knowing the difference between a credible underwriter and administrator is an important distinction to make and one that definitely needs to be evaluated before committing to a company or a program. As a first step, make sure you understand the responsibilities and differences between an underwriter and administrator. An administrator is the company that handles the day-to-day administration of the product's extended service plan such as processing claims and accepting monthly payments for the service. Often, the administrator's name and contact information is featured in the customer literature about the plan. The underwriter is the company that is ultimately responsible for the financial backing of claims according to the terms and conditions of the plan. 

Since not all administrators underwrite their own plans and vice versa, there are a number of extended service plan options available that allow retailers to customize a plan that's right for their products. However, the logistics of how a plan is carried out and who carries it out can reveal service inefficiencies, limited profitability and financial burden. In fact, according to some sources, a significant percent of administrators don't underwrite their own plans. The volatility of this approach can cause a number of problems for retailers including lack of funding or term changes that can become the retailer's responsibility in the event the provider declares bankruptcy. While this used to seem like an improbable situation, the recent filings of numerous multinational insurance companies make this harsh scenario a genuine reality.

Once you understand the roles of an administrator and underwriter, evaluating the provider's approach to maintaining financial responsibility and customer service will help determine the best program for your needs.

Financial Accountability

The most important point to consider when evaluating single-source plan providers or underwriters is the financial strength of the insurance company backing the program. If the company is financially unable to provide the benefits required, then you lose money, customers and credibility. Publicly traded insurance companies are an open book when it comes to examining financial status. Some areas to pay attention to include: historically good capital, recent acquisitions, ongoing organic growth and operating cash flows. Several organizations, including A.M. Best, Standard & Poor's and Moody's Investor Service, rate the financial strength of insurance companies. These ratings are among the most widely used indicators of an insurance carrier's financial health, or lack of it. Using these tools to assist in your evaluation is not only credible but universally accepted.

Customer Focus

The most important thing to your customers when they purchase a product with an extended service plan is how they will be cared for should something go wrong with the product. When a product fails, you need to rely on a responsive administrator to diagnose and troubleshoot the problem for customers in a timely and efficient manner. To help evaluate response rates, retailers should look at a provider's First Call Resolution rate, technical training for staff and network of service centers to ensure convenient and expeditious repair of products. In addition, service offerings such as fulfillment which includes carry-in, in-home and depot offerings or fulfillment by means of a new product, gift card or co-pay voucher delivered to the customer help maximize customer satisfaction.

Excellence in customer service is not an idle commitment so it's also important the provider shows how they successfully track, record and evaluate customer satisfaction to ensure they are meeting service level commitments. Another aspect to consider is how the administrator evaluates product reliability to continually develop competitive rates. Through comprehensive risk analysis, the provider can structure the extended warranty program in the most cost-effective way for the consumer yet profitable for the retailer.

While there are several factors a retailer needs to consider when choosing an extended service plan program, often the easiest and most profitable is working with a single-source provider for administering and underwriting the program. By selecting a full-service provider, you also have the benefit of flexibility in plans, categories, features and benefits to fit your needs and, more specifically, your customers' needs. While the fine print can be a bit overwhelming, selecting a single-source provider with proven credentials can help enhance revenues and build customer loyalty.

Filed Under: administrator, extended, plan, provider, retailer, service, underwriter