Published by Paul Swenson, EVP Business Development, After, Inc. on April 1st, 2016.
Over the years, I’ve been fortunate to work with great teams and have responsibility for many different business opportunities, including several regarding Extended Service Contracts (ESCs). These responsibilities have included large retail programs, missed-point-of-sale marketing operations, inbound/outbound telemarketing, underwriting and risk management, claim administration, etc. In all of these areas, my teams and I have constantly worked to find optimization opportunities to improve the customer/dealer experience, as well as financial performance. While there are many areas that can be addressed to improve the overall performance of ESC programs, there is one fundamental area that we find consistently missing in virtually every program – one that is at the very foundation of ESC program operations but is also one of the least understood. Wait for it – it’s coming!
At After, Inc., we have the privilege of working with many manufacturers and retailers on their Extended Service Contract programs. Our work on these programs can be broken down into three primary areas: Warranty Analytics, Warranty Marketing, and Warranty Administration. We work together on risk structures, pricing, terms, program benefits, marketing, channel optimization, competitive analysis and differentiation, administration systems, data management, and many other areas. While good opportunities for improvement can always be found in each of these areas, there is one governing principle that prevents most programs from becoming truly great:
Accurately forecasted Cost per Unit (CPU) at deeply segmented levels for each and every ESC offering – at the category, model, sub-model, term, age, etc. levels. Until accurate CPUs at these levels are known, any ‘optimization’ strategies deployed are, by definition, sub-optimal.
It is not enough to take current ESC rates or costs at face value. This is true whether these rates or costs are developed by internal accounting, a TPA (Third Party Administrator), or a carrier. Mistakes made at the CPU level compound, as an erroneous CPU then is used in the rate build equation, and then on to the internal price or price paid by a dealer and ultimately – with additional margin – to the end consumer. We find these mistakes – often huge – every time we partner with a new client.
Think of the implications. If you have accurate CPUs at these levels, you have the data-driven decision support to guide any program strategy you want. For example:
Do you want to consider different risk strategies? If you know more about your actual risk than anyone (including internal groups, carriers, TPAs, etc.), you can then drive your own risk strategies.
If you use a carrier to underwrite your program (we are involved with several in a risk oversight capacity, and these carriers can provide great services), you can do it from a position of strength and knowledge – developing a contractual relationship that is market driven, fair for both parties, and providing you flexibility in the future.
Price optimization becomes a competitive differentiator. Your competition – including direct competition, and third party contracts if this is part of your competitive set – can never under price you in the long run because you will know that your ‘rates’ or ‘premiums’ are based on accurate CPUs. Here is a recent example:
A client was working with rates provided by their third party – and the loss ratio provided by the third party in the underwriting reports was 90%. Advanced Analytics demonstrated an actual loss ratio of 51%. Average dealer cost was reduced from $575 to $326. Average MSRP (2X dealer cost in this sector) was reduced from $1150 to $652. Profit in the first year increased by more than 2.5 times.
We see these types of mistakes regularly. The example above is a bit extreme, but not at all unusual in context. In a future article, we’ll discuss the reasons for these mistakes. In the meantime, please feel free to reach out with questions and comments. . If you would like to speak with After, Inc. regarding your warranty programs, please give us a call at 800-374-4728. We’re always available for a conversation!