The Concept Of An Extended Warranty Service Plan

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.

The concept of an extended service plan, the focus on every phase of the
implementation, the value of piece of mind received by the customer, and the
opportunity for the retailer to obtain a very important revenue stream while
differentiating himself/herself from the competition, will produce a well-
structured, well-implemented, well-managed, and highly profitable Extended
Warranty program that will change the way the customer views his/her business
forever.

A. Well-Structured

•  A state-of-the-art Service Management Division
•  Insurance Managers try to minimize the claim payment. Service Managers give the customer the benefit of the doubt.
•  The Service Manager has best access to spare parts.
•  The Service Manager shares solidarity with manufacturers and knows the best repair centers.
•  The Service Manager has the highest trust with the repair centers.
•  The Service Manager has access to more than 20 years of actuarial repair history for every spare part. The Insurance Claims Manager does not.
•  The Service Manager performs proprietary Loss Control techniques with their repair centers.
•  Extended Warranty administrators are comfortable in keeping their books open for 5 year (sometimes up to 7 years) contracts.
•  Financially sound and professional EW administrators earn their fees on a monthly basis, not when the fee or premium is paid.
•  On-site call centers with a <2% call abandonment rate, calls of less than 2.5 minutes duration answered 80% of the time in less than 20 seconds.
•  Professionally trained outbound telemarketers for “missed opportunity” and renewal extension sales.
• Highly competent Training and “Train-the-Trainer” staffs.  The EW administrator has a menu of seven (7) product enhancements for further differentiation.
• Customer calls are answered on Saturdays.
• Paid transportation for products needing repairs in outlying areas.

B. Well-Managed

•  Well-planned, results-oriented, timely sales campaigns for the sales reps
•  Sales reps, as well as managerial and supervisory staff are awarded prizes for meeting sales objectives
•  Every store is visited at least once a month.
•  Five minute sales activity reviews are done daily by the store manager, supervisor, and their sales team. Sales sheets are maintained daily.
•  “Salesperson of the Week” plaques are displayed in visible locations.
•  Sales Accessory strategies such as 1) bundling printer cables, reams of paper, and an extended service contract, 2) selling batteries with every audio equipment, including a cell-phone case or extra cable with the sale of a phone in order to   increase profits.
• Remedial training for those who did not meet their objectives.
• Review of loss ratio in every product category with store owner in order to review product quality, maximize profitability, discuss factory warranty term increase or suggest re-designing the product.
• Report back to the owner that the manufacturers are maintaining a sufficient percentage of spare parts in stock.
• Provide monthly performance report for every make and model, frequency/severity by store, by department (“Brown”, “White”, Office
• Equipment, Autos). Provide Sales Penetration reports (unit sales and percentage of gross
• eligible sales) by sales rep, branch, division, and region.
• Report Call Center activity to the store owner.
• Provide profit-sharing when applicable.
• Attend the opening of all new store branches.
• Maintain a high level of commitment from HHRR, Purchasing, Finance, Systems, Inventory, Marketing, Store Managers & Supervisors to insure maximum performance of the sales reps which will guarantee the highest profits.

C. Well-Implemented

• Perform Job Description calibration for entering sales reps who have never sold an intangible.
•  Maintain a lookout for alternative financing sources for the store owner.
• Continually re-categorize pricing on new products, such as game modules, projection equipment, double-door refrigerators, in order to maximize the client’s profit potential.
• Maintain a close eye on what new services the client’s competition is offering.
•  Attend annual conventions with client in order to be updated on the latest technology and products.
•  Perform systematic audits with client.
•  Investigate with client other means of distribution such as O/B telemarketing, social media marketing, catalogue sales, Internet Sales,
• Direct Sales forces in order to maximize profit.

The insurance business has always been referred to as a People’s Business.
Insureds may buy an insurance policy from a friend, family relative, or from the
same broker they have used for the past 20 years. Retailers and auto dealers are
only interested in buying performance, the product with the highest margin. As
simply reviewing the competition’s website to see what the competition is selling.
The retailer must opt for the Service Provider who can prove that his/her
Attachment levels are indeed the highest at 50% of Gross Eligible sales or higher.

In an overseas branch, Extended Warranty is a matrix-based, multi-task, Process
Management discipline consisting of Systems, Accounting, Marketing, Training,
Administration, Service Management, and Underwriting, which must interface with
their corresponding department at the Home or Regional Office level.

Seven (7) contracts or policies are required for a full implementation of an Extended Warranty program with a retailer:

a. Administration Agreement

b. Reinsurance Treaty with ceding insurer                                                                                                                                                                                                                                                                                                       c. Service Repair Agreement with the mfg-authorized repair centers
d. Insurance or Service Contract to be delivered to the customer
e. Purchase Protection Insurance Policy Enhancement
f. Profit-Sharing Agreement
g. Contractual Liability Policy guaranteeing the obligations of the service obligor

Seven (7) sets of manuals must be prepared:

a. Training Manual for Sales Reps 
b. Management Training and Operation ́s Manual for the dealer or retailer
c. Systems Manual for 1) SKU or Vehicle Model Catalogue Creation, 2)
Collections, 3) Payment to Providers, 4) no. of contracts sold by
category, make, and model, 5) average contract term by category, make
and mode, 6) average premium for 2,3,5 year contracts, 7) average
frequency by category, make and model, 8) average severity by
category, make and model, 9) Average Parts cost, 10) Average Labor
cost, 11) Written Premium, 12) Unearned Premium, 13) Earned
Premium, 14) Claim $ paid, 15) no. of claims paid, 16) claims $ reported
but not paid, 17) total claims paid and incurred, 18) Loss Ratio, 19)
Average Severity for 6,000 models of 500 products, 20) Average severity
by category
d. Claims Manual
e. Insurance Superintendent Reporting Manual
f. Tax Procedures Manual
g. Rate-making Manual

In a mature market, Marketing, Accounting, Systems, and Operations would
suffice as the matrix model. A) Training would fall under Marketing, B)
Administration and Service Management would fall under Operations.
Underwriting would have a dotted line to Marketing.

Each of these areas is too new and culturally different in each country, requiring
different time or time lines, adaptation and flexibility to the local marketplace.
Conceptually, this is no different than many of the other products encountered in
the insurance world. It is extremely different, however, when retailers and their
staff must be convinced to adapt to an entirely new sales culture. Not an easy
task.

The owner of a retail chain (generally 2nd, & 3rd generation, or older) has to 1)
create a new management structure, 2), learn what is required to sell an
“intangible” successfully, 3) double the salary of his/her sales reps (due to
commissions received from the EW sales), 4) enter into a long-term contract with
an “intangible” provider, 5) obtain solidarity on the concept from his/her entire
management staff, 6) re-allocate management staff work hours in order to
accommodate this new concept, 7) invest in order to maximize profits by creating
new departments such as Outbound Telemarketing, Catalogue Deliveries, and
Internet Sales, 8) maximize profitability by not being price-sensitive to the cost of
EW and recognizing that the price offered by his/her competition will not matter.

Consumers never shop the price of an Extended Warranty. The price of the
intangible is in the mind of the sales rep....not in the mind of the consumer.

In the developing world, the top-down management commitment must always
begin with the owner of the retail chain (too many details are lost in explaining
the different disciplines to subordinates) and the Marketing Manager or Account
Executive of the Warranty Administrator must coordinate all implementation
activities between all divisions of the retailer and his/her own divisions. This is a
generally misunderstood complexity.