1. Extended
Warranty &
Service
Contract
Industry USA

2. 1
TABLE OF CONTENT
1. Introduction
2. Industry Structure
3. Market Size
4. Share in total economy growth
5. Report of Industry
6. Employment

3. 2
INTRODUCTION
An extended warranty, sometimes called a service agreement,
a service contract, or a maintenance agreement, is a
prolonged warranty offered to consumers in addition to the standard
warranty on a new items. The extended warranty may be offered by the
warranty administrator, the retailer or the manufacturer. Extended
warranties cost extra and for a percentage of the item's retail price.
Occasionally, some extended warranties that are purchased for multiple
years state in writing that during the first year, the consumer must still deal
with the manufacturer in the occurrence of malfunction. Thus, what is often
promoted as a five-year extended guarantee, for example, is actually only
a four-year guarantee.
Extended warranties have terms and conditions which may not match the
original terms and conditions. For example, these may not cover anything
other than mechanical failure from normal usage. Exclusions may include
commercial use, "acts of God", owner abuse, and malicious destruction.
They may also exclude parts that normally wear out such as tires
and lubrication on a vehicle.
These types of warranties are provided for various products,
but automobiles and electronics are common examples. Warranties which
are sold through retailers such as Best Buy may include significant
commission for the retailer as a result of reverse competition.[1]
For
instance, an auto warranty from a car dealership may be subcontracted
and vehicle repairs may be at a lower rate which could compromise the
quality of service. At the time of repair, out-of-pocket expenses may be
charged for unexpected services provided outside of the warranty terms or
uncovered parts.
In the United States, extended warranties are regulated by many state
insurance commissioners as "service contracts." Service contracts can
cover automobiles, consumer goods (such as appliances, electronics, lawn
equipment, etc...) and homes. The regulatory structure requires licensure
or registration of the warranty providers, financial solvency regulation, and

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service contract consumer disclosures. Service warranty "providers" apply
for licensure or registration, and then may sell their products, usually at the
point of sale of the product, for example at the car dealership, or at the retail
consumer electronics store. In the United States, a type of extended
warranty called vehicle service contracts are typically regulated by the
states as insurance. In July 2010, California issued a cease and desist
letter to several corporations which were selling the insurance illegally in
the state; the corporations contended that it was not insurance because the
contracts required that certain additives be used
INDUSTRY STRUCTURE
Basically, there are two types of extended warranty programs. The first is
called self-insured, due to the fact that the seller is taking the risk and
keeping the premiums themselves. The second is called fully-insured,
because there is a traditional insurance company underwriting the risk and
taking a portion of the premiums. With either type, there is always an
administrator, though there are both plans that are self-administered and
plans that are administered by outside companies (called third-party
administrators, or TPAs). And there's always a sales agent, though it can
be an employee of the self-administering, self-insured retailer, or it can be
a person contracted by the TPA. It can be a cashier. It can be an auto
salesman. But no matter who it is, they're probably going to get a hefty
sales commission
A company that's self-insured will be preparing itself for acquisition, and will
want to decrease its contingent liabilities by fully insuring its extended
warranty plan. This makes it easier to sell the business, because it removes
any uncertainty about the potential size of future liabilities. This also has
the benefit of immediately boosting profits, because essentially the reserve
is liquidated and split between the insurance underwriter and the
administrator.
How much each party gets is always open to negotiation. The underwriter
needs to be compensated for the risk, plus it needs to make a profit after
claims are paid. The administrator also needs to make a profit after
accounting for the overhead involved in claims processing. But in general,

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the three entities involved in the sale and administration of an extended
warranty split the premiums in the following way: the sales agent gets 50%,
the administrator gets 20%, and the underwriter gets 30%. That 30% is split
further into an amount set aside to pay claims (which Sebastian pegs at
19.8%), an amount to cover "fees" (just over 5%), and the remainder as a
buffer in case claims exceed expectations.
Extended Warranty Contracts
Premium Distribution Breakdown
These ratios vary tremendously given the type of product involved. With a
product line known to have a low loss ratio, there is less need for reserves,
and of course an expectation of fewer claims. With a new type of products,
the loss ratio will at least initially be unknown. Factors that need to be
considered include the typical lifespan of the product, the length of the
contract, and the projected cost of repairs/replacements. Another factor is
the "clout" of the participants, and their ability to take their business
elsewhere in pursuit of a bigger slice of the pie. For instance, a very large
electronics retailer may be in a position to demand a higher percentage of
the premiums as a sales commission.

6. 5
INDUSTRY SIZE
Figure. US extended warranty market 2014
As per warranty week estimates for 2014 the size of US extended warranty
market is $39.5 Billion and is witnessing an average growth of 7.33% per
year since past 6 years. It can be seen from the figure below. Major portion
consist of automobiles, followed by mobile phones, consumer electronics,
personal computers, home warranties and appliances.

7. 6
SHARE IN TOTAL ECONOMIC GROWTH
While the economic growth in U.S.A is more or less stagnant with an
average of 2.2 in past five years, the extended warranty industry has
shown a continuous growth with an average of over 8.33% during the
same period
The share of extended warranty industry in US GDP is .002%.

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9. 8
REPORTS OF INDUSTRY
The trend and share of various segments in the extended warranty in past
three years can be seen from the following figures:

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In the year 2013, the market stood at $37.9 B with major portion occupied
by Auto at 39%, followed by mobile phones at 21%, Personal computers at
19% and consumer electronic, home and appliances at 14%, 4.6% and
3.2% respectively.
The market was at $34.7 B in 2012 with Auto at 40%, PC at 20%, Mobile
Phones at 17%, consumer electronics at 14%, home warranties 4.9% and
appliances at 3.4%

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12. 11
The mobile phone extended warranty space has more than doubled in past
5 years with growth of 140.38% and average of 28.07%. Out of this major
portion consist of mobile phones sold by US based mobile companies,
followed by the ones sold by other retailers and Applecare

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•Claims payments peaked in 2008, U.S. manufacturers paid $29.5 billion
in claims during the year 2008
•Recession took hold 2008-2010, claims payments declined to $24.1
billion
•Steady warranty expense rates 2010-2014
 Sales rise but expenses don’t
 Signs of improved product quality
 Warranty cost-cutting & warranty analytics
TYPES OF RETAIL PRODUCT PROTECTION OPTIONS AVAILABLE
TO CONSUMERS
There are several distinct approaches to product protection plans. The
following are currently the main types of retail product protection options
available to consumers in the United States:
• Retailer Branded Product Protection Plans: Examples include
Walmart Product Care Plans, Target Protect, Best Buy Geek Squad
Protection, the Home Depot Protection Plans, and Lowe’s Protection
Plans.
• OEM-Branded Product Protection Plans: Examples include
AppleCare/AppleCare+ (for Apple Inc. products), and extended
warranties offered by OEMs such as Carrier Corporation and Whirlpool.

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• Third-Party, Direct-to-Consumer Product Protection Plan
Providers: Examples include offerings from companies such as
SquareTrade and Assurant 360.
At a high level, the three important types of industry participants include:
• The entity selling the retail product protection plan. This includes
retailers that offer either self-managed or third-party-managed retail
product protection plans to their customers.
• The entity obligated under the plan terms to provide the service. These
generally include the “obligor,” which is responsible for delivering the
protection service. Obligors work with “underwriters,” which are insurance
companies that underwrite the service contracts.
• The service providers. In-house or third-party network of repair and/or
replacement service providers that provide on-site/in-home or depot
repair and replacement services.

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Exhibit 3 uses the sales of retailers as a proxy to show the relative market
position of various retail protection providers in the CE and major
appliances product categories in the United States. It does not show the
market shares of retail product protection providers. Leading retailers
prefer working with a single provider for their retail product protection
requirements. However, online retailers–such as Amazon–offer protection
solutions from multiple providers, which has been considered in this
analysis. While this analysis does not represent 100% of the CE and major
appliance retail sales in the United States, it is estimated that these market
shares are based on sales representing more than 90% of CE and major
appliance retail sales in the United States. The key highlights of this
analysis are:

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• The self-managed retail product protection category represents nearly 38
percent of the total addressable market. Best Buy and Sears are the two
main retailers that offer self-managed retail product protection solutions in
the United States. Some providers may have a role to play in the self-
managed protection market as well. However, this research deliverable
does not focus on self-managed retail product protection plans.
• With customers such as Wal Mart Stores, Inc., Target Corporation, and
The Home Depot, Asurion commands a 34 percent market share of the
category spend for CE and major appliances in the United States. Thus,
retailers that work with Asurion for their retail product protection
requirements currently command a 34 percent market share in the CE and
major appliances product categories in the United States.
• SquareTrade and Assurant represent the next 19 percent of the total
addressable market. These participants have some notable accounts in
their customer portfolio. For example, SquareTrade services Staples
customers, and Assurant services Lowe’s customers.
EMPLOYMENT
The employment provided by major industry players is as under:
1) Asurion
 Specialties
Mobile Protection, Mobile Security Apps, Technology Services,
Technology Protection, Extended Warranty, Tech Support
 Website
http://www.asurion.com
 Type
Privately Held
 Headquarters

18. 17
648 Grassmere Park Suite 300Nashville, TN 37211 United States
 Company Size
10,001+ employees
2) SquareTrade
 Specialties
iPhone Warranties, Consumer Electronics Warranties,
Appliance Warranties
 Website
http://www.squaretrade.com
 Type
Privately Held
 Headquarters
6th Floor San Francisco, CA 94107United States
 Company Size
201-500 employees
3) Assurant Solutions
 Specialties
Service Contract Programs and Extended Warranties,
Consumer Electronics Protection Programs, Mobile Device
Protection Programs, Vehicle Service Protection Programs,
Debt Protection Programs, Appliance Protection Programs,
Preneed Funeral Insurance
 Website
http://www.assurantsolutions.com/

19. 18
 Type
Public Company
 Headquarters
260 Interstate North Circle SEAtlanta, GA 30339 United States
 Company Size
10,001+ employees
FINAL WORDS
 Retail product protection programs offer a convenient option to reduce or eliminate
disruptions in product usage. While protection programs cannot “prevent” a
problem, they can certainly ensure that consumers are able to get back to using
their products quickly and in a pain-free manner. It is critical for retailers to educate
consumers on the benefits of retail product protection programs, and how a
relatively small upfront payment can deliver complete peace of mind and
convenience at a later stage.
 Retailers should aim to improve customer satisfaction, increase customer loyalty,
increase store visits, and increase revenues from their retail product protection
programs. Retailers are encouraged to conduct a detailed analysis of the various
retail product protection providers in order to select the right partner that can help
them meet these growth objectives.
 Retailers should aim to improve customer satisfaction, increase customer loyalty,
increase store visits, and increase revenues from their retail product protection
programs. Retailers are encouraged to conduct a detailed analysis of the various
retail product protection providers in order to select the right partner that can help
them meet these growth objectives.
 The US extended warranty and service contract industry is growing at a decent
pace despite of the stagnant economy. This growth is expected to continue in
coming days and the present share of the industry 0.002% in country’s GDP can
expand further.

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BIBLIOGRAPHY
1) https://en.wikipedia.org/wiki/Extended_warranty
2) http://www.warrantyweek.com/archive/ww20040928.html
3) https://www.asurion.com/content/dam/asuriondc/docs/frost_and_s
ullivan_insight_retail_protection_aug2014.pdf
4) http://extended-warranty-services-review.toptenreviews.com/
5) http://www.warrantyweek.com/archive/ww20141009.html
6) http://www.warrantyweek.com/archive/ww20111006.html
7) https://www.casact.org/education/clrs/2008/handouts/nishimura.pd
f
8) http://peoplelearn.homestead.com/RESEarch/Module8B.html