XX
WARRANTY COVERAGE
A HUGE EMERGING MARKET
XHow would you like to get in on a new market representing more than $100 billion in premium and good loss ratios? That's the equipment maintenance or warranty coverage market. Mike McKee, account executive with Aon Risk Services in Portland, Oregon, points out that there's some $150 billion in equipment maintenance and repair done on an annual basis. "About one percent of that is insured."
Here's the deal
The cost of technology keeps going down. Margins are getting thinner and thinner, and original equipment manufacturers are making up for this loss in revenue by charging more for warranty coverage. Anyone who's bought new equipment recently can attest to the effort manufacturers make to get you to purchase additional warranty coverage. And it has worked. At the corporate level, estimates are that some 90% of businesses purchase some type of extended warranty on their equipment. Well, insured programs can save these businesses between 15% and 30%.
So why isn't every business switching to an insured program? And why aren't you out there selling this win-win product?
A number of problems have stood in the way of successful market penetration.
Despite the fact that a number of companies including CNA (through its 50% ownership of Specialty Underwriters), AIG, Kemper, Royal and others, offer this product, it is not that well known among agents.
What's more, it usually is a difficult sale for a couple of reasons. Let's take a look at them and ways around clients' objections.
Objection: Clients can't always find their warranties, especially if they have a large amount of equipment.
Response: That, in and of itself, is a strong argument for having the coverage for all equipment with one company. (But it does mean that you'll need to keep after the client in a helpful way in order to keep the search for the warranties ongoing.)
Objection: Clients don't believe they'll get the same level of service if they move the warranty away from the original equipment manufacturer.
Response: That's a difficult problem to overcome. It's not true, but you're dealing with feelings rather than facts. Here are a few counter arguments that can be made.
Mike McKee points out that in the equipment business "service drives sales. This is a competitive business with plenty of companies that will provide service. Manufacturers wouldn't dare scrimp on service out of fear that they would lose the next order for new equipment."
McKee continues that the history of this business argues in favor of the manufacturers living up to their promise. According to McKee, Specialty Underwriters was the first to develop some type of insurance policy warranty coverage about 16 or 17 years ago. "It started in the medical side of the business. That's life and death equipment that needs to be up and running. It worked there. It certainly will work in other industries and it has. There are several major banks and universities that have this coverage and it's working."
McKee goes on to cite an example where a potential client at a university in Oregon called a friend at Florida State because they had an insured warranty program. "He was told that the program worked well and the cost savings were impressive."
The benefits
In addition to cost savings ranging from 15% to 30% in hard dollars, there are other benefits to moving to an insured program for warranty coverage.
Depending on the program, there also can be significant savings in terms of soft dollars. McKee explains that there is a cost associated with writing a check. One of his prospects is a large grocery store chain. "If the entire chain was under an insured program, we estimated the hard dollar savings at around $22 million. But we also looked at potential soft dollar savings. The chain had approximately 500,000 invoices for equipment maintenance and repair. An insured program that took over this function would save the chain an estimated $7.3 million and that's a conservative amount. But the only way to see that savings is to opt for a program that completely outsources administration for equipment maintenance," McKee says, adding that that is one of the places where programs differ.
In fact, insurance programs vary widely. Some provide for complete outsourcing of administration; others don't. Some insurance companies go back to vendors and renegotiate on time and material. Some are trying to create a preferred vendor network.
McKee suggests that agents make certain the program matches the needs of the clients. "For larger clients with a lot of equipment, complete outsourcing can produce soft dollar savings and gets them out of the asset management business. In these days of outsourcing in order to focus on core competencies," McKee says, "this approach seems to make the most sense. The insurance company will come out and asset tag every piece of equipment. Essentially, your client is getting an asset management program and saving money."
McKee also expresses concerns about programs that involve re-negotiation with manufacturers. "That could put your client at risk. Their invoices might wind up on the bottom of the pile."
We've spoken to a number of agents who are starting to get into this business. They agree that it is a sale that takes a long time, but is well worth the effort. "Clients appreciate the savings and the reduced amount of time they have to spend dealing with multiple contracts," one agent noted. "It's been great."
Another agent says he is using this coverage as an entree into larger corporate clients.
McKee says that one area where the sale may be easier is the public entity business. That's because all business goes out for bid and "we have the lowest cost product." *
©COPYRIGHT: The Rough Notes Magazine, 1999