With the collapse of National Warranty Insurance Company, dealers nationwide are scrambling to protect themselves from what is turning out to be a colossal mess.
Many dealers wonder how and why this happened, what could have been done and what can be done. Many dealers are wondering whether their existing provider is next to go.
When National Warranty filed in the Cayman Islands for that country's version of bankruptcy protection, it became the auto industry's own version of Enron. Over 5,000 dealers sold the policies with many hundreds of thousands of policies still outstanding.
Claims are not being paid. Either the customers are holding worthless paper, or the dealer will be covering a lot of goodwill repairs. At least one class action suit is already filed.
This bankruptcy happened both gradually and suddenly. Contributing factors:
- A significant portion of business in high-mileage used vehicles with claims paid tending to be higher than industry average.
- A product priced below what's needed to support incoming and future claims
- Policy rates significantly below the rest of the market.
Add in a very aggressive and general agent representing the product, generous compensation plans, reinsurance companies that had been involved in arbitration with each other, and more lawsuits between the different parties.
It becomes clear how it all blew up. Not only was the math unsustainable, so was the structure.
For the first time, dealers are now asking their service contract providers if the contract rates being charged are high enough. Others are scrambling back to the perceived safety of their factory-sponsored extended warranty program and selling only those.
Independent providers, who generally perform better than factory providers in creating dealer satisfaction, suddenly have to answer questions about their solvency and strength.
So what steps should dealers take to protect themselves?
- Investigate the provider and product being offered by your general agent. Despite the length of the relationship, do the necessary due diligence.
- Understand the structure of the insurance providers involved in the policy used. Is the entire warranty business directly administered, underwritten and controlled by the company that initially provides the service contract? Or are other parties involved? Who's doing the underwriting, administrations, loss controls and claims administration? Is a reinsurance provider involved? Who's responsible for what?
- Check the AM Best rating of your insurance company regularly. National's rating had been downgraded twice in 2003 prior to their filing for creditor protection. It is easy to access the information on the Internet.
- Low contract rates should be one of the last reasons to switch providers.
- Question the current loss ratio and loss ratios per account. A higher loss ratio may mean either inadequate reserves or excessive claim payouts.
- Check wha loss-control systems and procedures the service contract provider has. There's a constant battle between trying to ensure customer satisfaction by paying claims promptly vs. not paying illegitimate claims. Having ASC certified technicians on staff should be a basic requirement.
The ideal way to select the best service contract provider for a dealership is by preparing a request for proposal and sending it to different companies.
Ask questions that protect the store and ensure getting the ideal provider.
Bryan Dorfler is an F&I consultant. E-mail: [email protected]