AUTO WARRANTY RESEARCH - News Releases

Would You Like Some Risk with Your Warranty?

The corporate irresponsibility of the early part of this decade was not confined to big names like Enron, WorldCom, and Global Crossing, nor to the energy and telecommunication industries. There were some high profile failures in the auto warranty industry, due to certain companies being built on the cheap. But the consumer ended up footing a huge bill after their warranty providers went belly-up.

With people keeping their cars longer due to a sluggish economy, consumer protection organizations are again sounding sirens about the common cause of the collapse of most warranty companies: The RRG.

A risk retention group (RRG) is essentially a pool of money contributed by multiple warranty companies, from which these companies can draw if their own reserve accounts are strained by unusually high claims costs. Many warranty companies succumb to the temptation of joining an RRG because the associated costs are so low, since it amounts to being self-insured. In the competitive world of auto warranties, keeping costs low – therefore prices low - can give that needed edge to attract consumers.

The more expensive alternative for warranty companies is to pay for independent, direct insurance from an established insurance company. The costs are higher for the warranty company, so that their policy prices may be higher, too. The amount of money available to a large insurance company, however, is vastly greater than that which is available to an RRG. If a warranty company is suddenly hit with high claims, the amount of cash at hand is what determines whether your warranty contract will pay your thousand-dollar claims for the next several years, or whether it’s merely an expensive piece of paper.

RRGs are vulnerable to failure because, compared to traditional insurance companies, they are weakly regulated, poorly funded, and most important, are linked to the warranty companies that they are supposed to protect, and are therefore subject to the same pressures straining the warranty company’s own reserve accounts, and subject to the same (mis)management of their associated warranty companies.

The warnings from consumer advocates about RRGs seem well-founded: Every major failed warranty company, most notoriously Warranty Gold, Ultimate, and First Assured, were backed by an RRG. Those companies’ customers may have spent slightly less for their policies compared to other companies they researched. But, years later, the money they saved has been paid out of their own pockets many times over in car repairs that their defunct warranty companies were supposed to pay. It’s best not to even ask one of these customers whether they have, or will, ever get their warranty price refunded. They won't.

Just because a warranty company uses an RRG doesn’t mean that it will fail. It means, however, that if it encounters financial dire straits – which can happen anytime, especially these days - the likelihood of complete meltdown is much higher, because less money is available, compared to a warranty company that is directly insured by a traditional insurance company.

Based on the history of the last decade, the security that warranty-purchasers seek will not be found in a company whose financial health relies on a shaky entity that has “risk” built into its name.

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