Aftermarket warranty program costs vary widely from vendor to vendor, even when coverages offered are similar. Reasons are many, but some of the more significant ones include differences in 4-wall expense, systems, efficiencies, profit objectives, and underwriting cost.
Underwriting cost alone are substantial and can account for 50% or more of program cost differences. Underwriting costs include such items as loss reserves that are paid upfront into a reserve to cover claim losses, risk premiums charged by underwriters as compensation for insuring risk, excess loss reserves retained by underwriters (a/k/a underwriting profits) and reinsurance related costs.
Certain practices tend to dramatically increase TPA underwriting costs, some of which once in play are difficult to correct. For example, risk pooling programs sold to dealers producing high claim losses with those generating low claim losses increases total pool losses and accompanying underwriting costs.
There are certain steps retail dealers can take to avoid paying a premium in the form of higher program costs to TPA, which we will cover in subsequent series. If you have a question about this blog or any issue you need help with, contact us at [email protected]