Warrantors Tackle New-Tech Dilemma

By Alan Wolf -- TWICE, 11/5/2007

NEW YORK — Extended-warranty providers devise service plan pricing and terms around the failure rates and life expectancies of the products they insure. But how do these companies cope with the consumer electronics industry, which thrives on introducing new devices like Apple's iPhone that never existed before?

To find out, TWICE asked the leading warrantors to explain how they develop protection plans for unprecedented products. Here's what they had to say:

Matt Frankel, division president, AIG Warranty: Since it could be 18 months before quality data is available on a new product's reliability, we try to extrapolate data from the closest existing product to see where the failures come from and set pricing accordingly. Sometimes it works, sometimes it doesn't, but risk is our business.

Bruce Saulnier, president, AMT Service: To price an extended warranty for brand-new products, we would try to get as much information as possible on the manufacturer's warranty, including product coverage, duration, type of service provided and post-repair strategy. Lacking that, we would develop costs based upon past frequency and severity experience on other comparable products for which we provide coverage. This is where our experience really pays off for us.

Keith Meier, extended service senior VP/general manager, Assurant Solutions: We have one of the most extensive databases of diverse product information. We also have an industry-leading pricing team with tremendous service-contract experience. We analyze losses for similar products and coverages, and monitor data gathered during the manufacturer warranty period to compare against our assumptions. This allows us to identify product issues early on and to work closely with our clients to share our findings as they quickly evolve.

Joe Romano, client development group VP, NEW Customer Service Companies: Accurate pricing has always been one of NEW's strengths, due to a number of key initiatives. First, our extensive actuarial database gives us a much better handle on accurately determining the performance of new and untested products than our competition. Second, due to our close, long-term relationships with multiple retailers and manufacturers, we consistently evaluate new products with remarkable success while they are still under development. Finally, the sheer volume of NEW's programs means that we are able to accumulate user data quickly and to price new, untested products in our programs proactively.

Joseph Saieda, chairman, RepairTech: We look to guesstimate a failure rate, the number of years the customer is likely to own the product prior to replacing it with a newer model, and how often the item is likely to be used either residentially or commercially. There are a number of other factors to consider but we would prefer to leave it to our actuary team to research, review, and report.

Jeff Oldenburg, marketing and business development VP, Service Net: In many cases new products or technologies mirror other existing technologies so you can make some educated guesses on how you think overall performance will be. Additionally, we have the ability to draw on the expertise of OEMs and the data they used to establish warranty reserves. Other factors to consider are the overall OEM product warranty, parts availability and discounts, and determining who the target audience is for the product and how it will be used.

Ultimately though there's no exact science here, so we watch new introductions very closely so we can react appropriately as changes are needed.

Doug Tudor, president, Warranty Corp. of America (WaCA): As with any pricing exercise, we analyze all the available information, determine estimated claims rates, and price appropriately.

Sean Hicks, president, Warrantech Consumer Product Services: With over 24 years of experience and having paid [out] over $1 billion, we have history that we use when it comes to pricing new technology. While new products have new features, they also tend to have the same functionality as older products, and our experience allows us to make educated assumptions on what to expect in terms of failures. We monitor the results regularly and get input from our service organizations throughout the new life cycle.