Warranty Burn Rates

Smoke & Mirrors: Warranty Burn Rates

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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