Retail Observer

RETAILOBSERVER.COM NOVEMBER 2020 40 EXPENSE VS. RISK Assuming they have considered these complexities and other factors an insurer will develop rates with a desired combined ratio in mind. The service contract provider adds their administrative fees to the insurance rates yielding what is known in the industry as a "dealer cost." The retailer then adds a desired margin to these costs, or accepts a suggested margin, usually 50%, offered by the service contract provider. Together these costs and margin percentage make up the retail cost of the extended warranty contract. Under this model at least 50% of the contract price is related to costs, and even less related to the actual risk involved. Is there more profit available for retailers? Potentially, if they are large enough and informed enough about alternative structures. The automotive sector of the service contract industry does a great job navigating risk management structures and advocating for themselves. Reinsurance, bonding, captives, excess of loss policies, and stop loss insurance structures are common in the automotive sector. For varying reasons, the "brown and white" goods segment has largely failed to embrace the additional revenue opportunities relating to service contract underwriting structures. HISTORICAL PRACTICES IMPACT COSTS Why does the first dollar insurance model that uses a Contractual Liability or Service Contract Reimbursement policies dominate risk management structures within the brown and white sector of the service contract industry? Other more cost-effective and proven compliance models exist that provide comparable protection to both customers and retailers. Moreover, these alternative models, which are approved by state regulators, provide greater program flexibility with the same underwriting diligence as their more expensive counterparts utilizing antiquated insurance policies as their means of compliance. The Service Contract Model Act, versions of which have been adopted by nearly every state, sets out the financial responsibility requirements for Service Contract Providers. It states in part: Section 3. C. In order to assure the faithful performance of a provider's obligations to its contract holders, each provider who is contractually obligated to provide service under a service contract shall: (1) Insure all service contracts under a reimbursement insurance policy issued by an insurer authorized to transact insurance in this state or; (2) (a) Maintain a funded reserve account for its obligations under its contracts issued and outstanding in this state, and (b) Place in trust with the commissioner a financial security deposit, consisting of one of the following: (i) A surety bond issued by an authorized surety; (ii) Securities of the type eligible for deposit by authorized insurers in this state; (iii) Cash; (iv) A letter of credit issued by a qualified financial institution; or (v) Another form of security prescribed by regulations issued by the commissioner or; (3) (a) Maintain a net worth of $100 million; and (b) Upon request, provide the Commissioner with a copy of the provider's or, if the provider's financial statements are consolidated with those of its parent company, the provider's parent company's most recent Form 10-K filed with the Securities and Exchange Commission (SEC) within the last calendar year. For full text of the Act visit : www.naic.org/store/free/MDL-685.pdf EMBRACING CHANGE Clearly, based on the language of the statute, there are equally compliant structures available to retailers that can give them and their service contract providers more flexibility to develop distinct programs that will provide better pricing, faster speed to market, and therefore, higher profit margins. The notion that in order for a program to remain compliant it must be insured with 1st dollar coverage from an insurer that happens to insure a particular provider is a fallacy. In a post COVID-19 world, retailers must embrace change to ensure their long-term success. While there are many areas that retailers must re-evaluate to deliver long-term profitability, the fastest to implement is a change to their service contract program. While CPS primarily offers 1st dollar coverage, we are not hamstrung by archaic methods of filing rates and forms like many of our competitors. Further, our ability to deploy flexible compliance models allows for less payments to middlemen and higher profits for retailers. By utilizing the far more cost-effective programs offered through CPS, retailers can maximize their service contract profitability without sacrificing customer experience or their financial security. Mike Ryan has over 25 years of experience in the Service Contract Industry, holding senior leadership positions in compliance, underwriting, sales and marketing, and product development at AIG, AmTrust, Starr Indemnity and Fortegra Financial. In his current role Mr. Ryan is SVP of marketing and business development at Consumer Priority Services. B U S I N E S S T R E N D S (continued) RO

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