Category Archives: Self-Funded Warranty

Smoke & Mirrors: Warranty Burn Rates

Car Dealers: What’s your Burn Rate? Do you know? Is it something your warranty company keeps you informed of?

Probably not! Unless, of course, they are about to increase the premium you pay for your warranties at which time you will be told what your burn rate is – and it will generally be high!

So what is your burn rate?
Simply put, it is the amount of claims you have had on your warranties against the amount of premium that has been set aside to meet those claims in a financial year, it is expressed as a percentage.

So you may be told that your burn rate is 85%
Sounds high, and probably justifies a price increase, but it is a meaningless figure unless you know the amount that has been set aside by the warranty company to cover claims.

Your initial thoughts may be that your burn rate is 85% of the amount you are paying for your warranties. So if you are paying £180 for 12 months cover you may believe that your claims are costing £153 per vehicle (£180*85%). But trust me, if your claims per vehicle was anything like that figure your warranty company would have dropped you a long time ago.

So how do you make sense of this burn rate?
Well, first of all the amount that you pay for your warranties has nothing to do with the amount that goes into the pot to pay claims. Generally there are a lot of mouths to feed from your purchase of a warranty, the administrator, an underwriter and a broker to name a few.

As a general rule of thumb about 45% of what you pay for your warranties is taken out to feed these people. This equates to £81 using your £180 cost example (£180*45%).

The £99 that is left is the bit that goes towards paying claims. So your 85% burn rate now equates to £84.15 per vehicle (£99*85%)
Still a bit high… and that is because there are often other mouths to feed every time a claim is made. Some administrators charge a claims handling fee of as much as £45 to process a claim, and if an engineer is called in at about £120 a time to verify the cause of the fault his costs are added to the claim.

Now if we work on a claims ratio of 1:3 the claims handling fee is costing £15 per vehicle (£45/3), and if an engineer is called out to investigate 1:20 claims that will cost about £6 per vehicle (£120/20).
If we remove this £21 of costs from your £84.15 per vehicle we are now down to £63.15.

So from your possible initial thought that your claims cost were £153 per vehicle (£180*85%) when we remove the smoke and mirrors we find your actual repair costs are only £63.15 per vehicle which gives a true claims burn rate of just 35.08% (63.15/180*100)
All of a sudden a price rise seems unjustifiable.

So if you are ever quoted a burn rate as the reason for an increase in warranty costs – ask questions.

Thank you for reading and I hope the contents will serve you well at some time. Next month lets ask the question “Whose customer is it anyway?” Nothing to do with GDPR but a lot to do with your relationship with your customers.

Thanks for reading,
Alan Davison

Self-Funded Warranty: It’s Not For Everyone

That’s what I often advise prospective clients when discussing self-funded warranties, and it’s surprising how many motor dealers still aren’t aware of the huge benefits of this tried and tested method of delivering a warranty solution. But like I said in the title, it really isn’t for everyone.

So what do I mean by that? Helping motor dealers “self-fund” their own warranty is something we have lived and breathed for over 33 years. So for those thinking “is it right for my business?”, the answer to that is simple and comes in two parts.

Firstly, how much time do you spend on vehicle preparation? If the answer is not a lot, then self-funding your own warranty is not for you. Self-funding your own warranty means covering the risk yourself should something go faulty with the customers car. For dealers who have the time and resources to prepare a vehicle well, it means you reap all the rewards.

The second part to the question “is self-funded warranty right for my business?”, comes in the form of a simple test.

Look at your last full year accounts, and see how much you spent on buying-in warranties. Then, over the same period, total up the income you received back from the warranty company in authorised claim repairs. If you don’t do your own repairs, ask your warranty company for the data.

Now, deduct the total claims paid out by your warranty provider, from your spend over the same period and you are left with a figure that may resemble a telephone number.

 

Let’s look at an example!

A good quality dealer, let’s call them Excellent Autos, selling 30 cars a month with 12 month warranties at an average cost of £130 per warranty. They would spend a total of £46,800 a year buying-in warranties (30 x 12 x £130).

Now, let’s look at one of our established dealers who has been using our self-funded warranty for over 18 years. They use an “all components covered” level of cover with a £3,000 individual claim limit, and an overall claim limit of the price paid for the vehicle.

They are currently running at £77.93 in claims per warranty, which includes internal and 3rd party claims. Using these figures for Excellent Autos, they would have claims costs totalling £28,054.80 (30 x 12 x £77.93).

In other words:

So what do these numbers tell us?

  • In one year, our example dealer “Excellent Autos” paid £46,800 to the warranty company.
  • They provided £18,745.20 toward “other dealers” warranty costs.
  • With a self-funded warranty, that £18,745.20 would be returned back to Excellent Autos as expired profit. This is just one of the huge benefits that comes with a self-funded warranty.

So do the sum for your business – are you a net contributor, or receiver? Then ask yourself, are you comfortable with the results?

I hope this post gave you some food for thought over the festive period. Perhaps the new year is the ideal time to look at your warranty costs. Next month we will lift the lid off the smoke & mirrors that is often referred to as “Burn Rate” .

Thanks for reading and may I close by wishing you all a very Merry Christmas and a positively prosperous New Year.

Alan Davison
Managing Director
Crystal Clear Warranty

Treating Customers… Fairly?

Treating Customers Fairly is without a doubt, the latest “buzz phrase” to be sweeping through most businesses at the moment. But what does it mean? How does it apply to the motor trade, and the aftermarket warranty? Is it not a concept that all businesses subscribe to as a matter of course? After all, if you don’t look after your customers you will soon run out of them, especially in today’s social media driven background.

Treating Customers Fairly
Treating Customers Fairly

Although our self-funded warranty is outside the scope of FCA involvement, we have always looked at “best practice”, and ensured we address all of their concerns in our Crystal Clear Warranty.

The aims of the Treating Customers Fairly programme are fully embedded within our core values and, no doubt, yours. But as an audit perhaps we need to identify what the FCA are looking to achieve with the Treating Customers Fairly programme, to confirm we are following best practice.

The Treating Customers Fairly programme aims to “help customers fully understand the features, benefits, risks and costs of the financial products they buy”.
The Crystal Clear Warranty that we offer is the only warranty product in the UK approved by the Plain English Campaign, for the clarity of the wording. We did this to ensure that our warranty was perfectly clear and easy to understand. The features, benefits, risks, and price paid are clearly shown.

The Treating Customers Fairly programme also aims to “minimise the sale of unsuitable products by encouraging best practice before, during and after a sale”.
Having a range of different cover levels allows our  to ensure that the right warranty is attached to the right vehicle. Also our free on-site training sessions reinforce the principles of how our warranty not only covers the principles of Treating Customers Fairly, but exceeds them.

What are the desired consumer outcomes of Treating Customers Fairly? The FCA have outlined six core consumer outcomes that it wishes to see as a result of the Treating Customers Fairly initiative. These are:

Outcome 1 – Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

Outcome 2 – Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

Outcome 3 – Consumers are provided with clear information and kept appropriately informed before, during and after the point of sale

Outcome 4 – Where consumers receive advice, the advice is suitable and takes account of their circumstances.

Outcome 5 – Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as described.

Outcome 6 – Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

I firmly believe that with the clarity of our products, the constant training we supply to client staff, and the internal training that you carry out in-house, we can be extremely confident that between us the desired outcomes of Treating Customers Fairly are being met in full.

Unfortunately, some warranty providers are attaching “risk” to the Treating Customers Fairly programme, and claiming that self-funded warranties fall foul of the FCA because if the car dealer goes out of business, then the customers are left without any protection. This is total rubbish.

Our self-funded warranty is outside the scope of the FCA, however all the best practices they have put forward have been integrated into our programme. What is more interesting, is that the alternative that they put forward and suggest you subscribe to, is more than often “a self-funded and non-insured warranty scheme”.

The simple test to discover the reality is to open up a warranty document that you presently give to the customer. If there is no Insurance Certificate or mention of an Underwriter in that document, then the customer will be left stranded if whoever is holding the “pot” goes out of business.

We of course, over our 30 year history, have experienced dealers going into liquidation. The reality is, however, that over 95% of the customers who were left stranded because of the dealer ceasing trading had their warranties reinstated by the new company who took over the business. We work with the liquidator to ensure that any potential buyer is aware of the self-funded warranty scheme that was run, and its liability. In a massive percentage of cases the purchaser of the business will take on the liability to retain the customer’s goodwill (and hopefully their business), and reflect the cost in the purchase price.

If you’re ever made to feel that your self-funded warranty is bad for customers through scaremongering tactics from other providers, because you are holding the money, just think about all the old Rover dealers. I imagine they will have wished they had access to the warranty pot.

If you would like to know more about our Self-Funded Crystal Clear Warranty, or have any questions, please give us a call on 01522 515600, or click here to request an information pack.