When a consumer buys a product, it usually comes with a manufacturer’s or retailer’s warranty which is a written guarantee, issued to the purchaser of an article by its manufacturer, promising to repair or replace it if necessary due to defects in materials or workmanship within a specified period of time. In other words, it is a guarantee that a product will be repaired or replaced if it breaks down. This is mandated by law, specifically by Article 1562 of the New Civil Code and Articles 66 to 73 of the Consumer Act of the Philippines (Republic Act 7394). Warranties are timebound, usually one or two years. Warranties are usual for electronic or mechanical goods such as household appliances (washing machines, dishwashers, microwaves, televisions) and automobiles. The usual indemnity is to cover the cost of repair or replacement if the repair is deemed uneconomical.
What is extended warranty
Upon the purchase of a product, a consumer may choose to buy an extended warranty. Extended warranty covers a consumer for repair costs after the manufacturer’s or retailer’s guarantee has expired. It is a prolonged warranty offered to consumers after a standard warranty for new purchases has expired. Extended warranty is also called a “service contract” or a “service agreement.” Some have also called it “breakdown insurance” or “repair insurance.” It has been referred to as a service contract because in case of defects, the product will be “serviced” or repaired. Extended warranties are paid for, and is purely optional. The decision to purchase an extended warranty should depend on your appreciation of the product purchased. There are products with a high repair rate, such as a desktop personal computer, while there are products with a very low repair rate, such as televisions and refrigerators. The duration of the extended warranty would depend on the offeror. It may be for two, three or four years.
Extended warranties are purchased at the time of the sale of the product. According to a consumers’ group, the purchase of extended warranties is appropriate for products which are expensive to repair or the repairs are needed frequently. Extended warranties may differ in their terms from the original manufacturer’s warranty.
Insurance product
Extended warranties are insurance products. It is an insurance policy. In the US, extended warranties are regulated by most state insurance commissioners as “service contracts.” In the state of New Hampshire, for example, extended warranties can only be sold by insurance agents. In Brazil in 2014, the Zurich Insurance Group, through its Brazilian subsidiary Zurich Minas Brasil Seguros S.A. entered into a distribution agreement with Via Varejo S.A., a major retailer of home appliances and furniture, for the exclusive sale of extended warranty insurance through the Casas Bahia and Ponto Frio branded store networks Via Varejo, covering almost 1,000 stores. The Brazilian market for extended warranty insurance is the largest in Latin America.
Counter view
IN Alberta, province of Canada, however, the Court of Queen’s Bench of Alberta (Court of Appeals), on July 21, 2011, has ruled in the case of Brick Protection Corporation v. Alberta (Provincial Treasurer) that an extended warranty is not insurance. The court ruled that “the distinction between a warranty and insurance is that a warranty covers the risk that the covered product will fail due to some inherent flaw or weakness in the course of normal use, while insurance covers the risk of unforeseen events or perils to the product unrelated to an inherent weakness in the product itself.”The Superintendent of Insurance in Alberta had considered extended warranties to be “insurance.” This ruling appears to be an exception to the general thinking of most jurisdictions.
7 comments
I’m very happy to discover this page. I newd to to
thank you foor ones time jujst ffor this fantastioc read!
Idefinitely reallly liked every little biit of it and I have you bookmarked to check ouut new things in your blog.
Depending on the country Extended Warranty can be sold in three different ways:
Country Legal Review
q Meet with Attorneys to determine the viability of selling extended service
contracts as a service or as insurance
q Analyze the most suitable of the three (3) methods to sell an extended service
contract in the particular country:
Ø Chain of Title Obligor (CTO)
CTO extended warranties obligate a manufacturer, distributor, or retailer
involved in the sale of the underlying product to the cost of future repairs
covered by the extended warranty contract.
The CTO may perform or outsource the marketing ,training, administration,
customer service, repairer network and parts sourcing, as well as other
functions related to the sale and administration of the EW contract.
The CTO may or may not purchase insurance to shift the burden of future
claims to an insurance company. The most common form of insurance used is
Contractual Liability. The policy is generally is limited to the obligations of the
obligor for claims expense related to the extended warranty contracts sold to
customers. The policy could be broadened to also include the administrative
obligations related to claim processing.
Ø Third Party Obligor (TPO)
TPO extended warranties are obligations of Third Parties outside the Chain of
Title. Many Manufacturers, Retailers, and Distributors market this form of
Extended Warranty as sales agents on behalf of the TPO. In this way the Seller
neither accepts nor creates any future liabilities or contingencies for the
repairs covered by the Extended Warranty.
The TPO may perform or outsource the marketing, training, administration,
customer service, retailer service, repairer network, parts sourcing, as well as
other functions related to the sale and administration of Extended Warranty
contracts.
Ø Mechanical Breakdown Insurance (MBI)
Extended Warranty can be sold as a form of Mechanical Breakdown Insurance
directly to the end user. The actual form of insurance varies by country. Most
countries require some level of licensing in order to sell and accept
commissions, form and/or rate filings as well as advertising and/or
marketing/material compliance. Many countries allow some form of group
policy with certificates issued to the end user, which may reduce certain
regulatory requirements.
The Insurance Company may perform or outsource the marketing, training,
administration, customer service, retailer service, repairer network, parts
sourcing, as well as other functions related to the sale and administration of
Extended Warranty contracts
The common terms in our insurance vernacular such as “risk management”, “long term commitment”, “utmost good faith”, “partnership”, “actuarial analysis”, “price increase to reduce underwriting losses”, “price increase to increase profit margins”, “loss control” are a “new language” to Brown & White retailers. A sudden drop in the economic cycle or any devaluation can be catastrophic. Yet these aforementioned words ring crystal clear to a retailer when Extended Warranty sales represent between 1% and 2% net-net profits against Gross Eligible Product Sales.
The CONCEPT of an extended service plan, the FOCUS on every important phase of the implementation, the VALUE of piece of mind received by the customer, and the OPPORTUNITY for the retailer to obtain a very important revenue stream while differentiating him/herself from the competition will produce a well-structured, well-implemented, well-managed, and highly profitable EW program that will change the way the retailer views his/her business forever.
A. Well Structured
q A state-of-the-art Service Management Division
q Insurance Claims Managers try to minimize the claim payment, Service
Managers give the customer the benefit of the doubt
q The Service Manager has the best access to spare parts
q The Service Manager shares solidarity with manufacturers and knows best
repair centers
q The Service Manager has the highest trust with the repair centers
q The Service Manager has access to more than 20 years of actuarial repair
history for every spare part. The Insurance Claims Manager does not.
q The Service Manager performs proprietary Loss Control techniques with their
repair centers
q Extended Warranty administrators are comfortable in keeping their books
open for 5-year (sometimes up to 7 years) contracts
q Financially sound and professional EW administrators earn their fees on a
monthly basis, not when the fee or premium is paid.
q On-site Call Centers with a < 2% call abandonment rate, calls of less than 2.5
minutes duration answered 80% of the time in less than 20 seconds,
q Professionally trained O/B telemarketers for “missed opportunity” and
Renewal extension sales
q Highly competent Training and “Train-the-Trainer” Staffs
q The EW administrator contains a menu of seven (7) product enhancements for
further differentiation
q Customer calls are answered on Saturdays
q Paid Transportation for products needing repairs in outlying areas
q A Technical Help desk is provided
B. Well – Managed
q Well-planned, results-oriented, timely sales campaigns for the sales reps.
q Sales reps, as well as managerial and supervisory staff are awarded prizes for
meeting sales objectives
q Every store is visited at least once a month
q Five-minute sales activity reviews are done daily by the store manager,
supervisor and their sales team. Sales sheets are maintained daily.
q “Salesperson of the Week” plaques are put up in visible locations
q Sales accessory strategies such as 1) bundling printer cables, reems of paper,
and an extended service contract, 2) selling batteries with every audio
equipment are suggested to increase profits
q Remedial training for those who did not meet their objective
q Review of loss ratios in every product category with store owner in order to
review product quality, maximize profitability, discuss factory warranty term
increase or suggest to re-design product
q Report back to the owner if manufacturers are maintaining their % of spare
parts in stock
q Provide monthly performance report for every make and model, frequency,
severity, by store, by department (“Brown”, “White”, Office Equipment, Autos)
q Provide sales penetration reports (unit sales and % of gross eligible sales) by
sales rep, branch, division, region.
q Report Call Center activity to the store owner
q Provide profit-sharing when applicable
q Attend the opening of all new store branches
q Maintain a high level of commitment from HHRR, Purchasing, Finance,
Systems, Inventory, Marketing, Store Managers & Supervisors to ensure
maximum performance of the sales reps which will guarantee the highest
profits.
C. Well-Implemented
q Perform job description calibration for entering sales reps who have never sold
an intangible
q Maintain a lookout for alternative financing sources for the store owner
q Continually re-categorize pricing on new products such as palm pilots,
projection
TV´s, double-door refrigerators in order to maximize the client´s profit potential
q Maintain a close eye on what new services the client´s competition is offering
q Attend annual conventions with client in order to be up-dated on the latest
technology and products
q Perform systematic audits with client
q Investigate with client other means of distribution such as O/B Telemarketing,
Catalogue Sales, Internet Sales, Direct Sales forces in order to maximize profits
The insurance business has always been referred to as a “people business”. Insureds may buy an insurance policy from a friend, family relative, or from the same broker they have had for the past 20 years. Retailers and auto dealers are only interested in buying performance, the product with the highest margin. As simply as reading the newspaper to see what the competition is selling, the retailer must opt for the Service Provider who can prove that his EW penetration levels are indeed the highest at 5% of Gross Eligible Sales or higher.
What happened to my first commentary?
My first commentary was regarding Brazil and Lat Am where i indicated that Zurich was late in the game in selling EW in Brazil (2014). I founded in 1996 the first warranty administrator and insurer in Brazil for AON & Virginia Surety, respectively. GE Capital, AIU, Cardif, Assurant, Assurion, Warrantech, and lately BRADESCO followed selling EW. MAPPIN was our first client in Brazil, followed by PAO DE AZZÚCAR. We opened in Argentina in 1997 with Garbarino, Frávega, Musimundo, Ozores, Disco, Carrefour, Falabelle, VEA, and CASINO. Total ANNUAL Gross Revenues in Extended Warranty sales for the two countries combined in 2014 was 400 million dollars. I mentoned that this is not a brokerage business and that THERE IS NO VALUE-ADDED that is provided by the broker. The EW demands a great deal of LEADERSHIP. All 5 legs of the business (Accounting, Training, Operations, Marketing, and Systems must dovetail flawlessly with the entire management division of the Brown & White retailer. Not an easy task. I also mentioned that two former execs with 30 years experience in the warranty business, all with AON, have put togethe a state’of-the-art IT Platform which is sine qua non when handling millions of policies. This is a complicated subject. But I wońt expand on this if you are erasing what I write.
Meant to say Falabella