Extended Warranty Captives Offer Another Source of Revenue to Business Owners

Many companies already use a captive – large, small or group – to reduce their cost of risk. Increasingly, however, many captive owners are extending the use of their captive (or setting up new ones) to include revenue-generating goals. Referred often as “profit center” captives, a frequent line of coverage underwritten is extended warranty coverage.

The U.S. Extended Warranty market was estimated at $39.5 billion in premiums paid for 2014, according to Warranty Week research. Extended warranties are sometimes referred to as extended service plans or maintenance contracts. Mostly associated with the vehicle service contracts, consumer electronics, HVAC, homebuilders, appliance and related industries, an extended warranty contract is an agreement that obligates one party (the obligor) to perform/provide specific remedies. Remedies may include repair, replacement or maintenance of the item covered.

The profits generated by the sale of extended warranties is very attractive and it is why we often see large insurance companies, such as AIG, AmTrust, Liberty Mutual, and Allstate, among others, provide coverage in exchange for premium. But in a similar fashion that a captive can reduce the cost of risk, a captive can also serve as a profit center. Indeed, for a growing number of retailers, large and small, many are using their captive to provide warranty and service contracts. In more than just a few cases, the profits derived from the sale of warranties, can be huge. For example, Best Buy made more than 50% of its operating profits in 2013 from extended warranties underwritten through their captive.

Companies that want to consider using a captive to provide a warranty for their products or services can either have the coverage directly written through their captive or have a fronting carrier actually issue the policy. If properly underwritten (including the use of an actuary, of course), the owner of the captive will capture profits and income that otherwise would go to an insurance company if bought through the traditional marketplace.