Warranty Reinsurance Issues
The best way to avoid problems with a service-contract provider is by asking plenty of questions before signing on.
The first question should be whether a service contractor is dealer obligor or administrator obligor, which determines who is responsible for repairs. Even if a contractor is administrator obligor, however, a dealer can be left paying for repairs if something goes wrong. Otherwise, he loses goodwill.
A critical area dealers must look into is how the service-contract provider is insured. This requires getting a copy of the entire insurance policy. There are different types of insurance and it is key to know which kind the provider has.
Just because a program is insured doesn't mean they'll pay the claims. If you are considering an insured program, a dealer should look for service-contract providers with first-dollar coverage, which provides payment for the full loss up to the insured amount with no deductibles.
Another type of coverage is called stop-loss and only takes effect when a set amount of money has been lost. If the provider has this type of insurance, the dealer needs to know what the policy's threshold is.
As National Warranty showed, making sure a company has insurance isn't enough. A dealer must next ask if the company is re-insured and by whom.
A dealer also needs to see a company's pure claim reserve chart. This shows the exact amount of money for each plan that is set aside to pay claims. It is crucial to know what the contractual constraints are for using the reserve funds.
In addition to the other documents, dealers should get copies of the actual service contract, dealer agreement and marketing materials.
Dealers often sign on with service-contract companies without paying attention to how they are affected if something goes wrong.
Any time a dealer gets negative feedback from a customer concerning a claim, the dealer has to check into it. Having the ability to cover a claim for your customers is a tremendous advantage to true ownership of your own warranty company..
Best Rastings
According to Best analyst Marc Leibowitz, the company reduced National Warranty's rating from excellent because of a drop in surplus that was driven by deterioration in operating results and unrealized losses on its investment portfolio, aggressive premium growth and actuaries refusing to sign off on documents pending a full reserve review. In addition to the downgrade, A.M. Best required a $4 million capital infusion into NWIG with no strings attached.
A Negative Outlook on the rating was also assigned at this time due to concerns with adequacy of loss reserves, weakened capitalization, and challenges associated with improving operating performance, Leibowitz said. A.M. Best took further rating action in May, downgrading NWIG to B-, a nonsecure rating, and put the rating "under review" with negative implications following the dispute with Yamagata that resulted in a number of institutions no longer lending money on NWIG's service contracts.
"We are in the process of writing a special report that will review the auto service contract industry; this article will detail our opinion as to what the consumer should be cognizant of when purchasing a vehicle service contract," Leibowitz said.
If a service contract company does get into trouble, a dealer needs to be careful how he responds.
When a dealer steps in and pays for repairs, he needs to use a form stating it's a goodwill repair. Otherwise, he may be getting into an implied service contract situation. He should send a letter to the service contract provider stating he is making the repair.