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Extended-Service Plans: Getting Down to Business

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.

Indeed, the Service Contract Industry
Council, a trade group, said
purchases of extended warranties
were up 10 percent last year. And
Best Buy’s revenue from all
services, including extended-
service plans, represented
7 percent of its total
revenue in fiscal 2009,
according to a Bloomberg

But how much do you really
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.

An easy starting point is determining
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 wellcapitalized
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, 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-set the playing field:


How is your cost divided between
insurance and administration?


What is each entity’s profit margin?


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 extended-service plans,
be more competitive, or collect more
profits and put them in your pocket.


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?


Do you participate in a
profit sharing program with
your insurer?


Is my program compliant
to protect my company’s
brand reputation?
Have all statutory compliance
and filings been addressed?

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.
Administrators also 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. 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. Keeping
the administration and underwriting
under one umbrella can provide a
hassle-free arrangement that ensures
warranty plans deliver positive
results for customers throughout the
life of the plans.

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.
Knowing who the extendedwarranty
players are and how they
impact your business can mean the
difference between profit and loss of
earnings, sales and customers.

Bruce Saulnier is president of
AMT Warranty and Warrantech,
and is a vice president of parent
company AmTrust. For more information,