Extended warranty industry in us

Extended Warranty & Service Contract Industry USA

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TABLE OF CONTENT

1. Introduction

2. Industry Structure

3. Market Size

4. Share in total economy growth

5. Report of Industry

6. Employment

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INTRODUCTION

An extended warranty, sometimes called a service agreement,

a service contract, or a maintenance agreement, is a

prolonged warranty offered to consumers in addition to the standard

warranty on a new items. The extended warranty may be offered by the

warranty administrator, the retailer or the manufacturer. Extended

warranties cost extra and for a percentage of the item's retail price.

Occasionally, some extended warranties that are purchased for multiple

years state in writing that during the first year, the consumer must still deal

with the manufacturer in the occurrence of malfunction. Thus, what is often

promoted as a five-year extended guarantee, for example, is actually only

a four-year guarantee.

Extended warranties have terms and conditions which may not match the

original terms and conditions. For example, these may not cover anything

other than mechanical failure from normal usage. Exclusions may include

commercial use, "acts of God", owner abuse, and malicious destruction.

They may also exclude parts that normally wear out such as tires

and lubrication on a vehicle.

These types of warranties are provided for various products,

but automobiles and electronics are common examples. Warranties which

are sold through retailers such as Best Buy may include significant

commission for the retailer as a result of reverse competition.[1] For

instance, an auto warranty from a car dealership may be subcontracted

and vehicle repairs may be at a lower rate which could compromise the

quality of service. At the time of repair, out-of-pocket expenses may be

charged for unexpected services provided outside of the warranty terms or

uncovered parts.

In the United States, extended warranties are regulated by many state

insurance commissioners as "service contracts." Service contracts can

cover automobiles, consumer goods (such as appliances, electronics, lawn

equipment, etc...) and homes. The regulatory structure requires licensure

or registration of the warranty providers, financial solvency regulation, and

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service contract consumer disclosures. Service warranty "providers" apply

for licensure or registration, and then may sell their products, usually at the

point of sale of the product, for example at the car dealership, or at the retail

consumer electronics store. In the United States, a type of extended

warranty called vehicle service contracts are typically regulated by the

states as insurance. In July 2010, California issued a cease and desist

letter to several corporations which were selling the insurance illegally in

the state; the corporations contended that it was not insurance because the

contracts required that certain additives be used

INDUSTRY STRUCTURE

Basically, there are two types of extended warranty programs. The first is

called self-insured, due to the fact that the seller is taking the risk and

keeping the premiums themselves. The second is called fully-insured,

because there is a traditional insurance company underwriting the risk and

taking a portion of the premiums. With either type, there is always an

administrator, though there are both plans that are self-administered and

plans that are administered by outside companies (called third-party

administrators, or TPAs). And there's always a sales agent, though it can

be an employee of the self-administering, self-insured retailer, or it can be

a person contracted by the TPA. It can be a cashier. It can be an auto

salesman. But no matter who it is, they're probably going to get a hefty

sales commission

A company that's self-insured will be preparing itself for acquisition, and will

want to decrease its contingent liabilities by fully insuring its extended

warranty plan. This makes it easier to sell the business, because it removes

any uncertainty about the potential size of future liabilities. This also has

the benefit of immediately boosting profits, because essentially the reserve

is liquidated and split between the insurance underwriter and the

administrator.

How much each party gets is always open to negotiation. The underwriter

needs to be compensated for the risk, plus it needs to make a profit after

claims are paid. The administrator also needs to make a profit after

accounting for the overhead involved in claims processing. But in general,

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the three entities involved in the sale and administration of an extended

warranty split the premiums in the following way: the sales agent gets 50%,

the administrator gets 20%, and the underwriter gets 30%. That 30% is split

further into an amount set aside to pay claims (which Sebastian pegs at

19.8%), an amount to cover "fees" (just over 5%), and the remainder as a

buffer in case claims exceed expectations.

Extended Warranty Contracts

Premium Distribution Breakdown

These ratios vary tremendously given the type of product involved. With a

product line known to have a low loss ratio, there is less need for reserves,

and of course an expectation of fewer claims. With a new type of products,

the loss ratio will at least initially be unknown. Factors that need to be

considered include the typical lifespan of the product, the length of the

contract, and the projected cost of repairs/replacements. Another factor is

the "clout" of the participants, and their ability to take their business

elsewhere in pursuit of a bigger slice of the pie. For instance, a very large

electronics retailer may be in a position to demand a higher percentage of

the premiums as a sales commission.

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INDUSTRY SIZE

Figure. US extended warranty market 2014

As per warranty week estimates for 2014 the size of US extended warranty

market is $39.5 Billion and is witnessing an average growth of 7.33% per

year since past 6 years. It can be seen from the figure below. Major portion

consist of automobiles, followed by mobile phones, consumer electronics,

personal computers, home warranties and appliances.

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SHARE IN TOTAL ECONOMIC GROWTH

While the economic growth in U.S.A is more or less stagnant with an

average of 2.2 in past five years, the extended warranty industry has

shown a continuous growth with an average of over 8.33% during the

same period

The share of extended warranty industry in US GDP is .002%.

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REPORTS OF INDUSTRY

The trend and share of various segments in the extended warranty in past

three years can be seen from the following figures:

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In the year 2013, the market stood at $37.9 B with major portion occupied

by Auto at 39%, followed by mobile phones at 21%, Personal computers at

19% and consumer electronic, home and appliances at 14%, 4.6% and

3.2% respectively.

The market was at $34.7 B in 2012 with Auto at 40%, PC at 20%, Mobile

Phones at 17%, consumer electronics at 14%, home warranties 4.9% and

appliances at 3.4%

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The mobile phone extended warranty space has more than doubled in past

5 years with growth of 140.38% and average of 28.07%. Out of this major

portion consist of mobile phones sold by US based mobile companies,

followed by the ones sold by other retailers and Applecare

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•Claims payments peaked in 2008, U.S. manufacturers paid $29.5 billion

in claims during the year 2008

•Recession took hold 2008-2010, claims payments declined to $24.1

billion

•Steady warranty expense rates 2010-2014

Sales rise but expenses don’t

Signs of improved product quality

Warranty cost-cutting & warranty analytics

TYPES OF RETAIL PRODUCT PROTECTION OPTIONS AVAILABLE

TO CONSUMERS

There are several distinct approaches to product protection plans. The

following are currently the main types of retail product protection options

available to consumers in the United States:

• Retailer Branded Product Protection Plans: Examples include

Walmart Product Care Plans, Target Protect, Best Buy Geek Squad

Protection, the Home Depot Protection Plans, and Lowe’s Protection

Plans.

• OEM-Branded Product Protection Plans: Examples include

AppleCare/AppleCare+ (for Apple Inc. products), and extended

warranties offered by OEMs such as Carrier Corporation and Whirlpool.

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• Third-Party, Direct-to-Consumer Product Protection Plan

Providers: Examples include offerings from companies such as

SquareTrade and Assurant 360.

At a high level, the three important types of industry participants include:

• The entity selling the retail product protection plan. This includes

retailers that offer either self-managed or third-party-managed retail

product protection plans to their customers.

• The entity obligated under the plan terms to provide the service. These

generally include the “obligor,” which is responsible for delivering the

protection service. Obligors work with “underwriters,” which are insurance

companies that underwrite the service contracts.

• The service providers. In-house or third-party network of repair and/or

replacement service providers that provide on-site/in-home or depot

repair and replacement services.

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Exhibit 3 uses the sales of retailers as a proxy to show the relative market

position of various retail protection providers in the CE and major

appliances product categories in the United States. It does not show the

market shares of retail product protection providers. Leading retailers

prefer working with a single provider for their retail product protection

requirements. However, online retailers–such as Amazon–offer protection

solutions from multiple providers, which has been considered in this

analysis. While this analysis does not represent 100% of the CE and major

appliance retail sales in the United States, it is estimated that these market

shares are based on sales representing more than 90% of CE and major

appliance retail sales in the United States. The key highlights of this

analysis are:

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• The self-managed retail product protection category represents nearly 38

percent of the total addressable market. Best Buy and Sears are the two

main retailers that offer self-managed retail product protection solutions in

the United States. Some providers may have a role to play in the self-

managed protection market as well. However, this research deliverable

does not focus on self-managed retail product protection plans.

• With customers such as Wal Mart Stores, Inc., Target Corporation, and

The Home Depot, Asurion commands a 34 percent market share of the

category spend for CE and major appliances in the United States. Thus,

retailers that work with Asurion for their retail product protection

requirements currently command a 34 percent market share in the CE and

major appliances product categories in the United States.

• SquareTrade and Assurant represent the next 19 percent of the total

addressable market. These participants have some notable accounts in

their customer portfolio. For example, SquareTrade services Staples

customers, and Assurant services Lowe’s customers.

EMPLOYMENT

The employment provided by major industry players is as under:

1) Asurion

Specialties

Mobile Protection, Mobile Security Apps, Technology Services,

Technology Protection, Extended Warranty, Tech Support

Website

http://www.asurion.com

Type

Privately Held

Headquarters

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648 Grassmere Park Suite 300Nashville, TN 37211 United States

Company Size

10,001+ employees

2) SquareTrade

Specialties

iPhone Warranties, Consumer Electronics Warranties,

Appliance Warranties

Website

http://www.squaretrade.com

Type

Privately Held

Headquarters

6th Floor San Francisco, CA 94107United States

Company Size

201-500 employees

3) Assurant Solutions

Specialties

Service Contract Programs and Extended Warranties,

Consumer Electronics Protection Programs, Mobile Device

Protection Programs, Vehicle Service Protection Programs,

Debt Protection Programs, Appliance Protection Programs,

Preneed Funeral Insurance

Website

http://www.assurantsolutions.com/

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Type

Public Company

Headquarters

260 Interstate North Circle SEAtlanta, GA 30339 United States

Company Size

10,001+ employees

FINAL WORDS

Retail product protection programs offer a convenient option to reduce or eliminate disruptions in product usage. While protection programs cannot “prevent” a problem, they can certainly ensure that consumers are able to get back to using their products quickly and in a pain-free manner. It is critical for retailers to educate consumers on the benefits of retail product protection programs, and how a relatively small upfront payment can deliver complete peace of mind and convenience at a later stage.

Retailers should aim to improve customer satisfaction, increase customer loyalty, increase store visits, and increase revenues from their retail product protection programs. Retailers are encouraged to conduct a detailed analysis of the various retail product protection providers in order to select the right partner that can help them meet these growth objectives.

Retailers should aim to improve customer satisfaction, increase customer loyalty, increase store visits, and increase revenues from their retail product protection programs. Retailers are encouraged to conduct a detailed analysis of the various retail product protection providers in order to select the right partner that can help them meet these growth objectives.

The US extended warranty and service contract industry is growing at a decent pace despite of the stagnant economy. This growth is expected to continue in coming days and the present share of the industry 0.002% in country’s GDP can expand further.

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BIBLIOGRAPHY

1) https://en.wikipedia.org/wiki/Extended_warranty

2) http://www.warrantyweek.com/archive/ww20040928.html

3) https://www.asurion.com/content/dam/asuriondc/docs/frost_and_s

ullivan_insight_retail_protection_aug2014.pdf

4) http://extended-warranty-services-review.toptenreviews.com/

5) http://www.warrantyweek.com/archive/ww20141009.html

6) http://www.warrantyweek.com/archive/ww20111006.html

7) https://www.casact.org/education/clrs/2008/handouts/nishimura.pd

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8) http://peoplelearn.homestead.com/RESEarch/Module8B.html