With hundreds of service-contract and extended-warranty firms in the marketplace, dealers may face a confusing array of options and a variety of services and charges.
Many dealerships have not looked closely at their service contract provider's performance on key issues, and thus may be involved with an insurance company that does not best suit their needs, or worse, is costing the dealership significant income.
The decision process should be more than picking a factory-sponsored program or an independent provider. There are specific questions dealers should ask when selecting a service contract provider. Some are general in nature, others are based upon the dealership size and appetite for risk.
There are four basic types of service contract programs, and choosing the appropriate one for the dealership should be examined. Brief descriptions of each are:
Direct — This is a commission-only program whereupon the dealership simply retains the difference between the price to the customer and the provider's rate sheet.
“Retro” — This program allows the dealership to share in underwriting and investment income from their service contract portfolio. It also requires dealership management of their loss ratios and a volume generally in excess of 30 contracts a month.
Reinsurance — The dealer with help from the provider establishes or participates in a reinsurance company to capture the upside potential similar to the retro program with similar management requirements as well. There may be additional tax advantages to this structure, however there have also been some recent IRS tax eligibility concerns as well.
Self-insurance — These programs virtually eliminate administrative expenses and keep the loss reserves in the hands of the dealership. But there can be many challenges. There is sometimes limited underwriting restraint with regards to claims adjudication and contract eligibility, which can create some dealership exposure and minimize necessary safeguards if not properly administered.
Services the provider can bring to the dealership should also be strongly considered. The extent of the relationship and the standards by which the provider is expected to perform should be established up front during the selection process. Things to consider include:
The ease of submitting claims, and the average time it takes for them to be paid
The accuracy of monthly financial reports, and the provider's responsiveness when a dispute arises
The procedures and capabilities for handling customer complaints and at what point do they involve the dealership
Procedures for authorizing repairs, and is there any amount that does not require pre-authorization
The rates of reimbursement for labor and parts
What type of training and representative support is offered to the service department, the F&I office and the sales department
The type of marketing materials available to help sell the product
The prior experience and background of the agent or representative who will be calling on the dealership.
Clearly, competitiveness and other financial performance issues should be closely examined prior to making a decision. However, the lowest rate sheet does not automatically translate to the best product.
It is of course prudent to review the proposed rates to measure their competitiveness versus the other providers that are being considered. However rates have a history of suddenly changing if they are too low, so it is important not to use this as the paramount measurement.
With one in four vehicles leaving U.S. dealerships with an extended service contract of some sort, dealers should pay close attention to this profit center. Awareness can protect the dealership financially, enhance customer service, and help eliminate problems that might have occurred in the past.
Bryan Dorfler is based in California and can be reached at [email protected].
