Second Annual Conference September 16, 2015 to September 18, 2015 Chicago, IL.

Transcription

1 Second Annual Conference September 16, 2015 to September 18, 2015 Chicago, IL.

2 Alternative Risk Management Strategies for Warranty and Service Contracts Jimmy Bynum President & CEO 2

3 Corporate Profile Alexander & Preston partners with manufacturers and distributors of commercial and industrial equipment. Our primary business is assisting our clients in maximizing their profits and strengthening customer relationships through the provision of extended service contracts (ESC), in addition to offering other risk management solutions. Private-labeled warranty and extended service contract (ESC) programs Strengthen brand loyalty With more in warranty customer service interactions over the life of the product, commercial manufacturers keep customers within their dealer network Increase revenue and earnings Increase attach rate to drive part sales and warranty premiums Captive Insurance Respond to product quality & reliability Ability to predict and respond more quickly to quality issues when they do occur 3

4 Discussion Points 4 Warranty vs. service contract Risk management for service contracts Captive to insure service contracts and enterprise risk The benefits of captive participation in service contracts. 4

5 Service Contract vs. Warranty 5 Warranty Warranty is the obligation of a product original equipment manufacturer ( OEM ) to stand behind the products it manufactures and for a defined period of time provide for repair or replacement of defective parts or workmanship. Service Contracts or Extended Protection Service Contracts, offered for a separately stated consideration by the OEM, dealers or a third party, to provide for repair or replacement of covered products with specific terms and conditions. 5

6 Obligors 6 Manufacturer Obligor Dealer / Distributor Obligor Administrator Obligor Manufacturer Warranty 6

7 How It Works - Consumer 7 Consumer Service Contract Provider Risk Management Consumer Retailer OBLIGOR Admin Service Contract provider handles sales and marketing Obligor is obligated to perform / deliver on promise Risk Management holds cash and financial risk Administrator handles claims for repair or replacement 7

8 Show Me The Money - Consumer ESC Obligor receives cash today to pay future claims obligations Traditional model has high retail margin selling expense may include commission Online extended protection sellers Currently, competition from mega retailers and lower product retails are putting pressure on margins Delayed revenue earnings Instant recognition Claims 40% Retailer profit 35% Provider Profit 15% Admin 10% 8

9 How it Works - Commercial Owner Dealer Contract Provider Insurance Company Provider designs program Insurance company holds cash and financial risk Dealer or manufacturer may be obligor Dealer provides service 9

10 Show Me The Money - Commercial Contract provider takes bulk of payment Combined loss ratios better than consumer Profits from underwriting and investment income are skewed to underwriters Parts and service revenue Dealer profit (ESC) 5% Admin 5% Claims 75% Underwriter Profit 15% $ 10

11 Service Contracts 11 Pros Stay connected to customer entire product life Drive parts & service sales Quality & reliability data collection Great margins and increased loyalty Challenges Potential for financial loss long term liability Customer service issues Service provider shortcomings Effective risk management critical to success 11

12 Risk Management Comparison Balance Sheet 3 rd party Captive Advantages Control Cash Simple Structure Revenue Deferred Disadvantages Lack of Core Competencies Retain Risk Revenue Recognition Compliance Risk Advantages Transfer Risk Revenue Recognized Disadvantages Surrender Cash Margin Reduced No Investment Income No Pricing Flexibility Claim Decisioning No Profit Data/IP sharing Advantages Control Cash Simple Structure Investment Income Profitable Pricing Flexibility Claim Decisioning 3 rd Party Risk Disadvantages Retain Risk Regulatory Filing Revenue Recognition Compliance Risk 12

13 Captive Insurance - Basics 13 A closely held insurance company that is owned and controlled primarily by its insureds Licensed insurance company Formed to insure or reinsure risks of owners or related parties Regulated under special legislation for captives Either onshore or offshore Enterprise risk and service contracts Requires feasibility study of business to determine viability and domicile 13

14 Why Captive 14 Primarily to increase control over all facets of insurance. Increased control over o Ultimate cost reduced cost & increased tax efficiency o Coverage breadth terms and conditions o Claims and Loss Control o Underwriting / Program Profit o Keep proprietary failure data in house Complete insulation / separation from the commercial insurance market is challenging due to capital requirements! If structured properly, service contracts may be treated as 3rd party risk for risk distribution purposes 14

15 Conclusions 15 Service contracts are an ideal way to improve margins and maintain connection with customers Risk Management is critical and captive insurance represent a logical path for many situations especially manufacturers Claims cost containment needed to maintain competitive pricing and value added programs Select risk management approach to meet your strategy 15

16 Presented By: Jimmy Bynum President & CEO Alexander & Preston, LLC Phone: +1 (615)