Extended Warranty Education -
Insurance vs. Risk
Retention
When you buy an extended warranty from Paragon
Motor Club, you can feel confident that your
warranty is directly insured by an insurance
company that has the financial stability to pay
claims today and in the future. Ask us about the
differences between an insurance company and a
risk retention group when purchasing an extended
car warranty.
To compare the differences between an RRG and an
insurance company backed warranty provider,
please use the table below...
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What's the issue?
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Insurance Company
Risk Retention Group
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What does this mean to me?
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If there is a loss due
to excessive claims or
inadequate funding for
the loss reserve account
the majority of the RRG
business will be
affected.
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Little or no protection
against losses for the
consumer with RRG's.
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RRG's are notorious for
putting "all of
your eggs in one
basket." Not a good
idea, usually.
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Validate your selection
of insurance companies.
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An "A" rated company has
met the operational and
financial conditions
necessary to earn this
rating.
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Failure to meet these
requirements should be a
"red flag" to any
consumer.
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Increase your ability to
access assistance in a
local jurisdiction.
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Most of the insolvencies
were covered by major
insurance companies or
individual state
Guaranty Funds
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The loss is minimized
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This will not be the
case if any of the
thinly funded Risk
Retention Groups who
insure tens of thousands
of service contracts
becomes insolvent.
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You should know who you
are dealing with.
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Do they have the
financial strength to
honor their agreement?
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Do
you
want to take that risk?
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Sufficient loss
reserves, underwriting
processes, and claims
analysis are functions
designed to ensure the
security of your
warranty.
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There is no substitute
for experience.
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Historical perspectives
is a must
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Consumer's purchase
extended warranties to
mitigate risks and, by
definition, tend to be
risk averse.
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Why risk your money with
a company that may not
be able to fulfill their
obligations.
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Insure a broad range
of products/services
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Invest premiums,
capital and surplus
in a diversified
portfolio
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Protect consumers
investment
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Maintain
"A" rating
with agencies
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A.M. Best, Standard
and Poor's,
Moody's Investor
Service, Fitch IBCA,
Weiss, TRAC, and
Ward Financial Group
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Rate insurance
companies on their
financial strength,
solvency, and
overall ability to
meet their
obligations in the
future.
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Industry accepted
practice
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Annual or quarterly
reports submitted
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Ensure compliance
with established and
approved guidelines
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Maintains the
integrity of the
insurance products
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Protection for the
consumers that are
insured.
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Guarantee Fund is
established in each
state
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Funded through the
premiums written by
each insurance
company.
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This fund provides
additional security
for insured's.
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Traditionally, an
extended warranty
underwritten by an
insurance company is
an agreement
directly between the
customer and the
insurance company.
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Many insurance
companies have been
in business for
decades.
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This experience
provides a
historical
perspective
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Further assures the
quality of the
products insured.
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A well-managed
insurance company
will write premiums
in any given year
not more than two
times their "capital
and surplus" base
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This is a key
measurement used by
A.M. Best to measure
insurer solvency
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This further ensures
the financial
strength of the
products/services
underwritten
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By definition, an
RRG is comprised of
similar risks
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All of the risk is
centralized within a
similar risk pool
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Little, if any,
diversification of
risk
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There are
approximately 12 RRG
that specialize in
insuring extended
warranties.
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None of these RRG is
rated by A.M. Best.
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Only one company is
reported and
requested an NR-4
(Not Rated
Categories)
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Licensed under the
Risk Retention Act
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May or may not
submit to the
jurisdiction of a
Department of
Insurance in each
state.
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Little oversight by
State Regulators
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RRG do not have
access to this fund.
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What does the
"Re-insurance"
cover?
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When does the
"Re-insurance" take
effect?
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What is the
"Re-insurance"
attachment point?
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Is there
"Re-insurance" if
the RRG is bankrupt?
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RRG warranties are
traditionally an
agreement between
the seller (e.g.
dealer, agent,
marketing firm,
etc.) and the
customer.
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RRG have only been
in existence since
1981.
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Of the 12 RRG that
specialize in
extended warranties,
the
oldest
company has only
been in business for
approximately 20
years.
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Little historical
perspective
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Many of the Risk
Retention Groups
that are insuring
extended service
contracts are so
thinly funded and
capitalized that the
tremendous premium
growth is
outstripping their
ability to properly
insure their
policies in the
event of a shortfall
in loss reserves.
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Many RRG backed plans offer a "Low
cost" extended warranty. RRG backed
plans can exist through dealerships,
direct-to-consumer marketers and so on. It
is important to know if the plan you are
researching is backed by an RRG.
Risk Retention Groups are not required to
undergo the scrutiny of insurance regulators
in each state the RRG is doing business in.
They can be established with very little
capital and because of their size, some
RRG's lack the sophisticated staff needed to
ensure that proper reserve funds are being
deposited to pay future claims. Most RRG's
in the automobile service contract industry
have been in business less than 5 years.
These same RRG's offer 7-year warranty terms
meaning that they have not yet experienced 1
full cycle of claims loss data. RRG's are
not eligible for the State Guaranty Fund and
offer little protection to the contract
holder should they become insolvent. To
offer the appearance of security, many RRG's
purchase reinsurance. If this is the case,
remember that the reinsurance is on the RRG
and not the individual contract holder. The
reinsurance policy also has policy limits
that may not meet the RRG total liability.
While researching an RRG backed extended
warranty, investigate their time in
business, policy limits, total liability and
volume of contracts administered. Remember
that lower price sometimes means higher
volume and that higher volume may create
future liability that exceeds cash reserves
and reinsurance limits with little hope of
protection for the consumer.
