Warranty Plans

Warranty Plans: Drive Value for Sellers and Consumers

Warranty Plans

  1. How do Warranty Plans Drive Value?
  2. What are Warranty Plans?

  3. How are Warranty Plans Developed?

  4. How are Warranty Plans Underwritten?

  5. What is the difference between a Warranty Plan Administrator and an Obligor?

  6. How do I choose a Warranty Plan Provider?

  7. FAQs

How do Warranty Plans Drive Value?

Warranty plans drive value for every member of the warranty ecosystem, from the OEM to the reseller, the service provider to the end consumer. OEM warranty plans

For manufacturers and resellers, warranty plans provide 3 key elements: guaranteed after warranty service options which improve the value of a product at the point of sale;  service based, recurring revenue streams driven by warranty plan sales and renewals; and lastly, the ability to offer consumers value added services in addition to simple break fix options provided by warranty plans. Such services might include onboarding, configuration, education and supplementary features like food loss, power surge, product replacement, accidental damage from handling (ADH) and theft/loss coverages- which also drive incremental revenue.

Service providers gain from warranty plans as well, in 2 key ways. First, service providers, particularly third warranty plansparty service providers, are recruited by warranty plan administrators to provide services guaranteed under warranty plans. 

Service providers are dispatched by warranty plan administrators and reimbursed for the parts and labor required to fix a product. Service providers are also retained to fulfill those ancillary services, such as onboarding, networking or customer education.

Lastly, service providers can also resell warranty plans provided by their own organization or sourced from a third party administrator or obligor. Think of the value that an in-home technician can bring when repairing or maintaining products, with the ability to back up their work with an extended warranty plan? Think of the enormous power in being able to inventory all of the eligible products in a home and offer the home owner a warranty plan which covers all of their appliances, electronics, computing, furniture, jewelry, tools and other home products like HVAC units and garage door openers. Warranty plans enable service providers to be a one stop shop for consumers, keeping their entire home's contents protected and guaranteed against failures.

Consumers gain peace of mind from warranty plans. Warranty warranty plansplans offer consumers guaranteed protection from product failures, for the life of the plan.  Additional features which go beyond break fix provide value added services such as set up of mobile devices and network configuration, and even provide replacement of damaged or lost products. Connected home warranty plans enable consumers to select products from their home to cover under warranty plans, on a month to month subscription plan. People say money can't buy happiness, but it can buy peace of mind.

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What are Warranty Plans?

Warranty plans, sometimes called extended warranties or service contracts, are often sold by manufacturers, retailers and service providers to provide services post product sale.  Warranty plans, extended warranties and service contracts typically begin after the expiration of the manufacturer's warranty, and provide repair for failed products, inclusive of parts and labor.

Some warranty plans, often called DOP or date of purchase contracts, wrap around a manufacturer's warranty, providing services which 'uplift' the manufacturer's warranty, adding additional features such as configuration or food loss protection from the first day of the manufacturer's warranty, or simply extending the parts and labor coverage offered by the manufacturer for additional periods of time, from monthly subscriptions, to annual contracts. 

warranty plansWhereas manufacturer warranties protect the consumer from product failure during the manufacturer's coverage period, warranty plans like extended warranties and service contracts serve 2 purposes historically: to protect the consumer from expenses related to product failures after the OEM warranty ends, and to drive additional revenue for product manufacturers, resellers and service providers.  

Warranty plans including extended warranties and service contracts are also often regulated by some government agencies, which mandate certain funding, licensing and processes. Home warranty plans offer coverage not only on consumer products like appliances and electronics, but also on home systems and structural items, such as HVAC systems, plumbing, electrical, and foundations, and are regulated more tightly and more often by state entities.  

How are Warranty Plans Developed?

Warranty plans are developed by manufacturers, retailers, service providers, third party administrators and obligors, which are sometimes insurance companies, and typically are segmented by product category-think washer versus TV- and price point. Additionally, warranty plan developers also consider the physical coverage in creating their plans, including repair, term of coverage (years), whether the plan is an extended warranty or DOP service contract, as well as inclusion of maintenance or other features like food loss, configuration, ADH or theft/loss.warranty plan revenue

Warranty plans consider the elements above in addition to the frequency and severity of repairs and age of product in developing the plans, particularly plan pricing.  Frequency is the rate at which a product fails, expressed as a percentage, while severity is the cost to fix the product, expressed in currency. Frequency X severity equals the loss cost of a contract and is the amount of money the obligor expects to spend honoring the contract. Great actuaries are able to use market research and claims history to estimate loss costs well, ensuring warranty plans are priced correctly and able to cover expected losses. 

Administrative costs, including taking calls/chats from consumers, recruiting, vetting, managing and dispatching service providers and job management are layered on top of the loss costs and margin required by the obligor, and make up the wholesale price that the reseller must pay the warranty plan developer to sell the contract. Resellers mark up the contracts to cover their own margin requirements.

Wwarranty planarranty plans can be a great source of revenue for resellers, both at the point of product sale, as well as down stream through the execution of 'POS Miss' programs, which include soliciting consumers whom purchased product but not contracts at the point of sale. Renewal campaigns can also be lucrative for resellers as they generate recurring contract revenue long after the product sale.

 

How are Warranty Plans Underwritten?warranty plan

Warranty plans are generally underwritten by insurance companies, either directly through their own warranty plan administrator business units, or through third party administrators like OnPoint Warranty.

Based on the loss costs calculations above, the premiums paid to the underwriter are 'reserved' in accounts for future losses.  As warranty service events occur and are managed by warranty plan administrators, insurers pay for the cost to repair or fulfill other contract features from the reserve. Well planned reserves are adequate to pay all future costs associated with a warranty plan, service contract or extended warranty.

Differences between a Warranty Plan Administrator and an Obligor

By definition, an obligor is an entity who is contractually or legally committed or obliged to provide something to another person (the obligee) or entity, or obligee, the person to whom the benefit of an obligation must be provided.  In the warranty plan world, obligors are obligated to pay for services rendered under warranty plans such as service contracts or extended warranties. 

Warranty plan administrators can be the same as or different than an obligor, based on how they are licensed.  There are 2 types of licenses, administration licenses and obligor licenses in the USA.  A segment of states require registration to be recognized as an administrator, which currently includes:  CA, ME, NY, TX, UT, and WI.  Administrators execute warranty plan coverages but are not obligated legally to pay for services promised. Obligor licensing is much more arduous and requires a significant amount of information about the business and its owners as well as bonding in some states. Again, the obligor is on the hook for paying for services promised.

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Choosing a Warranty Plan Provider?

Use these four rules of thumb to pick the best warranty plan providers.

  • Experience

Rely on warranty plan administrators which have extensive experience in the service and warranty plan space. Experience in the creation, underwriting and sales of plans provides you with a partner who understands for innovative warranty products, the need for and risk related to non-compliance with state laws, and what you as a reseller of warranty plans- or a consumer- require to purchase.

  • Backing/ underwriting

Choose a warranty plan administrator whom is backed by A rated insurance companies, like Starr Companies, whom underwrites warranty plans for OnPoint.  Insurers have deep pockets, and the good ones maintain those deep reserves by using the latest in actuarial science to price warranty plans correctly.  Well priced programs drive margin for warranty plan resellers and peace of mind for covered consumers. 

  • Execution

The rubber meets the road when a consumer needs service. Warranty plan administrators need to execute warranty planswarranty service well to drive great customer experiences. Warranty service requires warranty plan administrator recruit, credential, onboard, contract with and manage a service network. Some of these entities hire their own work forces and will provide depot, exchange or in field service fulfillment, while others will contract with third party service providers. Some use a combination of both.

A well managed network necessary for warranty plans to deliver great service. Solid process, clear expectations, great support and cutting edge technology which offers omnichannel consumer entitlement and service scheduling to dispatching and claims functionality are critical to providing a super service experiences to every consumer.  Warranty plans such as extended warranty and service contracts cover multiple different types of products and brands, ranging from appliances to electronics, computer equipment, mobile products to HVAC and even home systems like plumbing, electrical and foundations. So, the recruiting requirements are complex, the licensing and credentialing are necessary, the cost of service and time to deliver service are critical to maintaining pricing and profitability of the book, as well as great customer experiences, which drive brand loyalty and future revenue. 

  • Innovation

Choose warranty administrators that offer more than simple break fix options. With the prevalence of handheld and smart technologies, warranty plans now can also offer additional services such as set up of mobile devices and networking products, installation and even 'how to' tutorials.   Uplifted coverage that coincides with the manufacturer's warranty, as well as extends protection through many years after product purchase, can include traditional power surge and no lemon, but it can also include ADH and theft/loss.

IoT is used by the most cutting edge warranty plan administrators to identify additional products for coverage.  Simply by using technology a technician in the home or even a consumer with an app can 'sniff' out products connected to wifi and register them, creating a customized warranty plan which covers everything in the home. Subscription plans are an even newer concept. Revolutionary warranty plan administrators enable consumers to define what they want covered, and modify coverage as their portfolio of products changes. This model makes monthy subscription payment options critical as the fee per month changes with what's covered!

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Frequently Asked Questions

What is a warranty plan? A warranty plan is an extended warranty or service contract which offers extended repairs or additional features and benefits not covered by the OEM warranty.
What is an Obligor? An obligor is responsible for funding obligations under warranty plans, extended warranty or service contracts. 
What is an administrator? An administrator is responsible for executing service obligations under warranty plans, extended warranty or service contracts. 
What is an underwriter? Underwriters are often obligors on warranty plans. They provide insurance which back the financial obligations of a warranty plan, extended warranty or service contract.
What is a warranty product? A warranty product can be described as an extended warranty or service contract which offers extended repairs or additional features and benefits not covered by the OEM warranty.
 What is an OEM? OEM is an acronym for an original equipment manufacturer and is another term used for manufacturers.
 What is an OEM or manufacturer's warranty? OEM warranties are promises made by the manufacturer related to product performance.
 What is an extended warranty or service contract? Extended warranties and service contracts provide extended break fix repair service for products sold by OEMs, retailers, and service providers. They often provide additional coverages not offered by the OEM.
What is ADH? ADH stands for accidental damage from handling and is a common addition feature of service contracts particularly on mobile handsets.
What is Theft Loss? Theft loss is also is a common addition feature of service contracts particularly on mobile handsets that covers the loss of a device. This warranty product often includes a deductible.
 Are service contracts insurance?  In some states and in Canada, service contracts can be considered insurance for a variety of reasons.
 What does underwriting mean related to OEM warranties and service contracts? OEMs must set aside a reserve or fund to cover the costs of anticipated or estimated warranty repair costs. An insurance company can step in and enable the OEM to offload this expense through insurance policies, impacting the balance sheet.
What is an ODM? ODMs are manufacturers whom build components, parts or entire products for other entities, which in some cases are branded by an OEM or retailer. Warranties and extended warranties and service contracts are valuable for ODMs because they enable ODMs to provide additional value to their customer and downstream consumers through enhanced service options.
What is service fulfillment? Service Fulfillment is the act of provide warranty services, including repair, maintenance, delivery and installation of products.

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OnPoint offers underwriting, warranty plans, extended warranties and service contract administration, service fulfillment, service technology and logistics.

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