Entering a New Country to sell Extended Warranty

Article sponsored and written by Victor Honoré :

Victor Honoré has a 32 year career in international insurance and reinsurance with managerial positions in Australia, Buenos Aires (twice), Rio de Janeiro, Washington DC and New York City. He has hands-on working experience in more than 40 countries. He founded the first two extended warranty companies in Latin America (Brazil/1996 and Argentina/1997) and has a great deal of knowledge on the subject. The two warranty companies he founded for Aon Corp in 1996-2001 reached $400 Million in Annual Gross Revenues in 2014. Victor is available for extended warranty and service contract consulting and advisory roles.

Global insurers are always looking to incorporate new products in their long term international strategies. The “intangible” product of Extended Warranty or Extended Service Contracts has always proven to be difficult to understand for insurers, retailers, wholesalers, manufacturers, auto dealers, service organizations due to its complexity in implementation and execution. On many occasions the decision has been not to enter the warranty business because it has been considered too time-consuming to implement, too costly to operate, too risky, too complex, too people-intensive, actuarily too difficult to predict, inflation sensitive, and very difficult to marry the concepts of “intangible” risk with “tangible” retail. Due to lack of knowledge and inexperience with this “intangible”, many foreign retailers believed their countrymen would not purchase such a product.

Extended Warranty as a product line involves the creation of an international extended service organizational plan implemented through a highly skilled IT-processing management team and system. Such an optimally-skilled team will assist retailers, wholesalers, manufacturers, distributors, credit card companies, other insurers, associations and affinity groups in integrating and then enhancing all their business functions. The optimally-skilled organization is also necessary to optimize the identification, analysis, acquisition, development, and retention of lifetime customers through the supply of superior value-added technology combined with creative processes to maximize the clients net profit margins and its other financial goals.

Contrary to what occurs with other lines of insurance, where the demand for insurance products and services is driven by a) Legislation (Third-Party Liability, WorkersCompensation), b) Financial Guaranty or Collateral required by third parties (Performance/Supply Bonds and other forms of Surety, Credit Life, Homeowners Insurance, Property Business Interruption Insurance, Disability Insurance), c) Government Environmental and Employment Regulations (Unemployment Insurance, OSHA, Environmental Impairment Liability, etc), d) Federal or State Financial Solvency Requirements (Reinsurance, Risk Management, Claims Control, Loss Prevention and other forms of Risk Transfer), Extended Warranty is a self-perpetuating product which must seek and create its own demand by making use of every marketing tool, not generally found in the traditional insurance distribution sectors.

In today’s business climate, America’s largest corporations are all focused on a single objective: to achieve the quickest, most effective, least costliest route to deliver the best value to the demanding consumer. The era of the value-based Knowledge expectations, the Relationship Economy, the confluence of global communication and economic phenomena, the ever increasing rapid acceleration of Information Technology, the spread of horizontal forms of organization, dynamic teaming, and virtual enterprising will be concentrated in a simplified form and reach almost every consumer.

If there is any single business to be categorized as a “one-on-one” concept, there is no better example than the sale of extended service plans. The plan must be sold. Value must be created. it is one of the few products in the world which is simply not price-sensitive. No one compares warranty prices prior to buying a product. $49.99 or $69.99 for an extended service policy does not come into discussion when purchasing a product.

“Peace of Mind” has no price.

The “Brown & White” retail industry is very different from ours. In addition to the standard 1) Best Price, 2) Best Service, 3) Best Quality, 4) Personalized Attention, 5) Tradition, 6) Reputation, 7) Trustworthiness image that every retailer takes for granted, his/her “bottom line” translates into 1) Liquidity, 2) Expansion, 3) Improvements & Betterments, 4) Highest Margin, 5) Lowest “Shelf Life”, 6) Lowest Financing Costs, 7) Highest Sales per Square Foot, and 8) Exclusivity whenever possible.

The common terms in our vernacular such as “Risk Management”, “Long Term Commitment, “Utmost Good Faith”, “Partnership”, “Actuarial Analysis”, “Price Increase To Reduce Underwriting Losses, Price Increase to Secure Better Profit Margins”, and “Loss Control” are a “new language” to many foreign retailers. A sudden drop in the economic cycle or any devaluation of the currency can prove to be catastrophic. However, these aforementioned words ring crystal clear to a retailer when Extended Warranty Sales represent between 1% and 2% net-net profits against Gross Eligible Product Sales.

The “intangible” product of Extended Service Plans in foreign markets will mature much faster than it did 65 years ago in the US (Sears Roebuck began selling their first Extended Warranty products in 1955) and Europe. Over the years, many new types of Extended ServiceContracts have come into the market. Below are some of the products.

• Purchase Protectio
• Price Protection
• Refund Protection
• Product (such as Cell Phones) Accidental Damage
• Credit Life
• Involuntary Loss of Employment
• GAP Insurance
• Collision Damage Waiver outside US & Canada & for all card members
• Virus Protection for PC’s
• Electronic Wire Transfer Insurance
• Industrial Equipment Service Contracts
• Furniture Protection
• Home Assistance
• Home Warranty, including: Plumbing, Electrical Wiring, Roofing, Telephone Wiring
• Glass Breakage, Heating/Cooling units, and including factory warranty extensions on “White” goods
• Extended Warranty on motorcycles, recreational boat engines, jet skis, snowmobiles, bicycles, drones, and other motorized vehicles
• Extended Warranty on Watches

There are numerous distribution channels to approach. It’s not just Brown & White retailers and Auto dealers:

 

•  Store chains, hyper-markets, store outlets, manufacturers, importers, wholesalers, buying clubs
• Newspaper classified ads for homes and cars (Seller newspaper box is differentiated by a “Guaranteed” logo)
• Specialized Auto & Homeowner Classified Ad magazines
•  Auto inspection services
•  TV Cable Companies (EW for up to 10 years on the Subscriber’s TV sets, DVDs and more importantly the satellite dish and cable box for a small fee included optionally in the monthly bill)
•  Gas pipeline companies, sponsored by government funds, that install heating units in low income homes by offering 5-10 year financing for the installation of a $1500 unit -the warranty premium (included in the financing) ensures the equipment is in good working order for the duration of the loan up to 10 years and ensures that the homeowner will continue to make those payments
•  Gas and Electric Companies include inserts in their monthly billing statements offering to insure all of the subscriber’s “White” goods for a blanket price, which can be included in the bill
• Automobile Clubs offer EW on Roadside Assistance to their members
• Dealer associations sponsor the sale of EW to their members
•  EW sales to large individual auto dealers
• Banks include EW on Leasing, New and Used Car Loans, GAP Insurance, protects the Bank’s assets in the event the car is stolen or totaled and recovers the unpaid balance in the event of a customer default
• Credit Life, Disability, Involuntary Loss of Employment on the Loans
• Credit Card Enhancements on eligible purchases
• Multi-million units per/month Catalog Distributors
• Multi-level Direct Sale companies (10.000 sales reps) that sell eligibles, such as water filters and vacuum cleaners ($190 million in Brazil alone) door-to-door
• Inbound EW sales through specialized catalog sales (computers and projection TVs, for example)
• Outbound TM to those customers who use a bank credit card and did not purchase an EW at the time of purchase (call is made 30 days prior to the 12 months expiration of the factory warranty)
• Extended and Limited Warranties as enhancement to insurers (“Direct Line” type) who sell outbound and renew in-bound with customers who wish to purchase EW or LW as an enhancement to their existing Auto PD policy.
• Insurers can add a Limited Warranty (LW) enhancement to a totaled or stolen car which requires replacement.
• Home Warranty (covers Gas Electricity, Plumbing, “White” appliances, telephone wiring, locksmith expense, glass breakage) sold thru a) Real Estate agents (buyers or sellers), b) builders, c) architects, d) developers, e) Condominium associations or cooperatives, f) Mortgage banks, g) Internet sites
• In-the-box extended warranty sales to those customers who call to register the factory warranty on the product they bought, followed up by the I/B TM team.
• Manufacturer-sponsored 5-yr extensions or transmissions purchased by Used Car consumers
• Extended Warranty on automobile tires.

The first step in deciding to enter a country is to write a country profile establishing the potential size of the market:

• Population
• Number of Households
• Income Per Capita
• Exchange Rate
• Gross Domestic Product
• Total Number of PCs
• Total Number of Web Users
• Web Commerce Spending
• Web Commerce Spending-Home
• Total Number of Brown & White retailers in the country
• Total Number of Eligible Appliances and Electronics sold (in units) Total Amount of $$$ spent on eligible appliances and electronics
• Total number of PCs, Printers, Scanners, etc sold
• Total number of cell phone users
• Total Cell Phone Subscribers per 100 population
• Total Cell Phone Manufacturers and Distributors
• Average price per Cell phone (with service included)
• Total Number of Cars
• Total Number of Insured Cars
• Total Number of Car Manufacturers and Assemblers
• Total number of Imported car makes
• Total Number of New Cars sold annually
• Total Number of Used Cars sold annually
• Total Number of car dealers by Manufacturer
• Average time ownership of car
• Breakdown by Compact, Standard, Executive, 4x4, Light Commercial
• Average price paid for new car
• Average price paid for used car
• Average Number of cars sold per dealer per month
• Total Number of Credit Card holders
• Average number of cardholders per major Financial Institution
• Top credit card - issuing Banks
• Top independent credit card issuers
• Top regional credit card issuers
• Average expenditure per cardholder per month
• Number of eligibles purchased by cardholder per month in a year
• Number of Gas Utility Companies
• Number of customers in a major Gas Company
• Number of Telephone companies
• Number of Customers in a Telephone Company
• Number of Electric Power Companies
• Number of Customers in an Electric Power Company
• Number of Cable TV Companies
• Number of subscribers per Cable TV Company
• Number of Apartments or Homes sold annually
• Number of Condominium or Cooperative Groups
• Number of Condominium Association Managers
• Average Monthly Condominium or Coop Fee
• Number of Real Estate Agents
• Number of Home or Apartment Builders
• Number of Developers
• Number of Homeowner Mortgages
• Number of Homeowner Mortgages by Financial InstitutionNumber of New and Used Homes Newspaper Listings per month
• Number of New and used rentals Newspaper Listings per month
• Number of Homeowners Insurance policies sold
• Number of Jewelers
• Number of Watch Repairers
• Number of watches of all makes and models sold
• Top Brown & White Specialty Retailers
• Top Brown & White Associated Buying Groups
• Top Computer Stores
• Top Hyper-markets (Walmart, Sam’s Club, Makkro, Carrefour, etc)
• Top Department Stores
• Number of Small Retailers by Region
• Number of manufacturer-authorized repair centers in the country.

After pro-forma questionnaires are sent to the various countries and later received, an evaluation would then made to determine what makes the most strategic sense and where should a regional operation be established. A “beachhead” must be established first. A champion retailer, manufacturer, utility, mega dealer must express a full commitment to roll out such a complex but extremely lucrative and necessary Extended Warranty program. We would then begin with a:

Country Legal Review

• Meet with Attorneys to determine the viability of selling Extended Service Contracts as a service or as insurance
• Analyze the most suitable of the three (3) methods to sell an Extended ServiceContract in the particular country:

Chain of Title Obligor (CTO)

CTO extended warranties obligate a manufacturer, distributor, or retailer involved in the sale of the underlying product to the cost of future repairs covered by the Extended Warranty contract.

The CTO may perform or outsource the marketing ,training, administration, customer service, repairer network and parts sourcing, as well as other functions related to the sale and administration of the EW contract.

The CTO may or may not purchase insurance to shift the burden of future claims to an insurance company. The most common form of insurance used is Contractual Liability. The policy is limited to the obligations of the obligor for claims expense related to the extended warranty contracts sold to customers. The policy could be broadened to also include the administrative obligations related to claim processing.

Third Party Obligor (TPO)

TPO extended warranties are obligations of Third Parties outside the Chain of Title. Many Manufacturers, Retailers, and Distributors market this form of Extended Warranty as sales agents on behalf of the TPO. In this way the Seller neither accepts nor creates any futureliabilities or contingencies for the repairs covered by the Extended Warranty.

The TPO may perform or outsource the marketing, training, administration, customer service, retailer service, repairer network, parts sourcing, as well as other functions related to the sale and administration of Extended Warranty contracts.

Mechanical Breakdown Insurance (MBI)

Extended Warranty can be sold as a form of Mechanical Breakdown Insurance directly to the end user. The actual form of insurance varies by country. Most countries require some level of licensing in order to sell and accept commissions, form and/or rate filings as well as advertising and/or marketing/material compliance. Many countries allow some form of group policy with certificates issued to the end user, which may reduce certain regulatory requirements.

The Insurance Company may perform or outsource the marketing, training, administration, customer service, retailer service, repairer network, parts sourcing, as well as other functions related to the sale and administration of Extended Warranty contracts.

Below are some basic initial steps to be taken when launching an Extended Warranty and Insurer. This is not an Action Plan. Just a general outline.

Create the Project Charter

• Write an Overview of the Project Scope
• Determine the Team’s boundaries for Creating the Deliverables
• Select members from different divisions of the Company that will participate in the project
• Define the particular country’s Customer Criteria for Acceptance
• Determine Required Reviews and Approvals
• Establish Risk Limits
• Select Project Leader and Team Members
• Set limits for Staffing and SpendingCreate List of Required Reports
• Identify Organizational Constraints and Project Priorities
• Assemble the Project Charter

Work Together as a Team

• Develop team ground rules
• Determine Meeting Guideline
• Create an Issues list

The Plan

 

• Obtain sign-off on the scope of the project
• Complete list of Required Reviews & Approvals
• Assess the Risks connected with the Project Scope
• Complete list of Required Project Status reports
• Update review of Team Effort
• Create Project Budget
• Assemble the Project Plan

Doing the Project

• Monitor Project Progress
• Resolve Problems and Manage Change
• Hold project Team Meetings
• Hold Project Review meetings

Defining the subsequent steps of the Planning Phase

 

• Review client commitments that were made
• Hold feedback meetings with clients
• Review timelines
• Ensure that the Client’s Senior Management has a Project Management Process that project teams can follow
• Ensure that the project plan meets both the customer’s needs and the EW administrator’s needs
• Ensure the project planning is completed on time and within the project’s limit and constraints
• Review the seven (7) contracts to be signed with the Client.
• Review all Training material, Point-of-Sale material, Advertising, and any other externality
• Set forth specific dates for the commencements of all interface activities of Systems, Accounting, Training, Operations, HR, Marketing between the EW Administrator/Insurer and the Brown & White Retailing Client