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Warranties Backed by a Risk Retention Group

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    styles34styles34 Member Posts: 1
    whats the difference between a risk retention group and not one, and what types of other insurance companies are there?
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    joel0622joel0622 Member Posts: 3,299
    Its a long read but worth it.

    Service Contracts and Risk Retention Groups
    PREFACE
    Never in history has the non-factory vehicle service contract ("Extended Warranty") industry been in such poor financial shape and poised for a major service contract provider and/or insurer insolvency.

    With the service contract industry's loss ratio approximating 185% in 2001 and faced with the prospect of continued losses in the future, many major insurers of vehicle service contracts (those Rated A+ X or higher by A.M. Best) have discontinued offering insurance coverage for extended warranty companies. This pull back by such well-known and financially secure insurers as Travelers Insurance Group has forced many extended warranty companies to move their service contract business to Risk Retention Groups or even "off-shore" reinsurance companies.

    Perhaps the biggest challenge to face our industry today is the use of Risk Retention Groups to provide "insurance" coverage for service contract business. The migration by extended warranty companies to Risk Retention Groups can be driven by numerous factors, such as:

    Lack of insurance coverage available in the market from the major domestic insurers.
    Ease of establishing a Risk Retention Group - requires filing in only one state and a minimum of capital investment (usually $500,000 or less).
    Desire by some to avoid regulatory oversight of their service contract insurance and business transactions.
    The lack of supervision, regulatory audits and oversight requirements for Risk Retention Groups.
    Get rich scheme - write lots of premiums (service contracts), siphon off the money and don't be around when the Risk Retention Group becomes insolvent.
    Risk Retention Groups ("RRG's") are federally chartered and are not required to undergo the scrutiny of insurance regulators in each of the states in which they do business. There is little or no oversight of Risk Retention Groups by any Federal agency and relatively little, if any, checks and balances from state regulators to insure that RRG's comply with sound insurance and/or business practices. There is no "Guaranty Fund" or other safety net for dealers or contract holders in the event a RRG becomes insolvent.

    Risk Retention Groups can be established with very little capital ($500,000 or less). Because of their size many RRG's lack the sophisticated staff/professionals (risk managers, actuaries, underwriters, etc.) necessary to ensure that adequate funds are being placed in reserves to pay for future claims. The lack of experienced staff combined with an almost manic desire to grow business has resulted in some RRG's allowing their agents to sell extended service contracts at inadequate and unsafe rates.

    Rapid growth in premium has caused several Risk Retention Groups to be faced with the challenge of controlling growth and setting aside adequate reserves for future losses. Typically, a well-managed insurance company will write premiums in any given year not more than two times their "capital and surplus" base (this is a key measurement used by A.M. Best to measure insurer solvency). 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. In fact, we have seen several Risk Retention Groups resort to not reporting insurance premiums by putting the loss funds in a so-called "Trust" account and treating the premiums as "Excess of Loss" or "Off Balance Sheet Funds" and only reporting an "insurance fee" as actual written premium. Risk Retention Groups that don't report the true premium exposure for which they are liable are not only deceiving the selling agent, automobile dealer and general public, they may also be guilty of a criminal offense.

    How bad is it? There are several Risk Retention Groups directly at risk for losses on thousands and, in at least two cases, millions of service contracts written at inadequate rates. Some Risk Retention Groups try to disguise their lack of capital and surplus and/or solvency by claiming to have "Reinsurance" coverage. However, on close scrutiny the "Reinsurance" coverage is either non-existent or only a simple excess of loss coverage for a very small part of the Risk Retention Groups' ultimate loss exposure. EXAMPLE: One well known RRG who insures service contracts brags on their web site about having written over $210 million in gross premium. When you examine their audited financials, these funds do not appear and they had less than $1.7 million in capital and surplus at 12/31/01. Their web site would also lead you to believe that all their service contracts are reinsured by a large highly rated reinsurer but when you read the audit information you find there is very little reinsurance coverage.

    For those Risk Retention Groups who continue to insure service contracts at inadequate rates, they will continue to have to pay losses on yesterday's contracts with today's premium. Their loss experience will continue to deteriorate and the reversal of cash flow will have a disastrous effect.
    Unless a miracle happens in the next twelve months, there will be at least one, and maybe more, major Risk Retention Group insolvency. It is likely that these insolvencies will cause the failure of several large Extended Warranty companies.

    PURPOSE
    This booklet is designed to make automobile dealers and service contract agents aware:

    That insurer insolvencies can occur, especially when service contracts are insured through a poorly capitalized Risk Retention Group;
    That insolvencies hurt the dealer's and agent's business, their customers and impact his/her profitability;
    What some of the risks are to dealers and agents who sell service contracts insured by thinly capitalized Risk Retention Groups and/or "Offshore" Reinsurers;
    That there are simple and easy methods to determine which insurers are most likely to become insolvent.
    INSOLVENCY DEFINED
    Webster's Dictionary defines insolvency as "unable to pay debts." For an "Extended Warranty" company, Risk Retention Group or "Offshore" Reinsurer this normally means that their liabilities exceed their assets. An insurer may be insolvent and still in business - if it can defer paying its debts. A common practice found with insurers who have eventually become insolvent is that they pay claims on contracts or policies sold in prior time periods with premium received from the sale of today's contracts or policies. Deferring debts in this fashion is a short-lived strategy because it compounds eventual losses and when current premium sales level off or drop there are insufficient funds with which to pay losses. Without the infusion of new capital or a major turn to profitability through rate increases, the insurer will almost certainly become insolvent.

    INSOLVENCIES OCCUR - HISTORY
    From
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    stevev65stevev65 Member Posts: 1
    I've had Great transactions with AA Auto Warranty in the past, and one of my policies is with Warranty America. I've had Great service with Both AA Auto Warranty, and Warranty America. Also, I think your info on the insurance backing is old. According to Warranty America and my contract are now insured by an INS company and NOT a RRG. this is the info I got from Warranty America's web site. "Warranty America has upgraded their insurance coverage from an RRG to direct insurance coverage. The new insurance carrier is First Commercial Insurance Company, 7900 N.W. 155 Street, 2nd Floor, Miami Lakes, FL 33016. Their telephone number is 800-291-7776." Hope this helps out
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    mitzijmitzij Member Posts: 613
    From Warranty America's website:

    EFFECTIVE 11/1/2007 WARRANTY AMERICA, LLC IS NO LONGER INSURED BY CAPITAL ASSURANCE RRG

    - See memo below for details


    Memorandum

    To: ALL WA Producers and Agents

    CC: First Commercial Insurance Company

    From: Jason Currier, Paul Stratch & Ted Terry

    Date: 10/31/2007

    Re: Change in Carrier

    Because Capital Assurance Risk Retention Group (CARRG) has asked us and all of their other clients to stop writing new contracts with them, WA has secured a new carrier for our products. We have decided to use an insurance company with substantially greater surplus than CARRG as this will provide greater carrier stability.

    WA is financially strong and will continue to administer and pay claims as normal for CARRG customers. WA's agreement with CARRG provided for WA to hold and control all CARRG reserves. CARRG shutting off their phone number should not concern you. We are still here processing and paying claims as normal.

    WA's ongoing operation and financial condition are not impacted by CARRG's inability to write new business.

    The carrier that we have chosen is First Commercial Insurance Company (FCIC) located at 2300 W. 84th Street, Hialeah, FL 33016. Their contact number is (305) 919-9727. FCIC is over five times larger than CARRG and with size comes financial stability.

    Here are some of the details of the change:
    1. The insurance company statement will change to list FCIC as the new insurance company.

    2. The declaration page will list our new policy #.

    3. Two states (OR & UT) will be added to the non-approved list. We will be actively filing to provide those states again in the near future.

    4. We will be providing a new Florida program shortly.

    5. You will have the ability to sell a low cost product warranty (TracGaurd).



    Please call any of us if you have any questions.




    Business clients will appreciate that Warranty America has developed a portfolio of fully insured products that are competitively priced and professionally administered. We provide you with all the marketing tools needed to maximize your service contract sales penetration. Through innovation and customization of our programs we can meet any client's "special needs". Warranty America acts as a third party administrator, adjudicating claims for all of our programs "in house", as we believe that is the only way they will get the best attention to detail and service. Our nationwide Marketing Agent network is our most important asset and is always available to assist you.

    We can build custom programs upon request, and we are also happy to look at claims administration for other companies that are in need of a quality, reliable, and honest claims administrator.

    Please take the time to review the links above to learn more and contact us with any questions.

    This does not say current contract holders are covered by the new insurance company. Their repeated assurances that all CARRG claims will be paid make me nervous. Can't think why...

    I remember a similar situation a few years back. Something about Warranty Gold rings a bell.
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    oldfarmer50oldfarmer50 Member Posts: 22,786
    Today I received a mailer offering extended warranty coverage because: "Your warranty is about to or already has expired".

    Which of my vehicles should I put the EW on?

    1) 1985 Ford F-150 with over 250K miles.

    or

    2) 1997 Chrysler Cirrus with about 100K miles.

    I'm thinking the Ford because I hear they really fall apart after 260K miles. ;)

    2019 Kia Soul+, 2015 Mustang GT, 2013 Ford F-150, 2000 Chrysler Sebring convertible

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    mitzijmitzij Member Posts: 613
    :P I received one of those, too! My 16 year old Chevy needs a new catalytic converter-is that covered? ;)

    260k? That Ford's just getting broken in!
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    yohohikryohohikr Member Posts: 4
    Got the notices about extended warranties and have read several in depth, who's best to analyze the terms, a lawyer or MIT mechanical engineering graduate,
    I'm neither. Is there a simple, comprehensive , user friendly extended warranty out there for a Toyota highlander under 36000 miles?
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    mitzijmitzij Member Posts: 613
    simple? No such critter exists. Nessie is less elusive.

    comprehensive? No. The closest to comprehensive is a manufacturer-backed plan. Everything else is junk.

    user friendly?
    What? You think they want to pay claims? Keeping you confused is their goal. And they do a fine job!
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    crisismanagercrisismanager Member Posts: 1
    I have a 2009 Saab on order and Saab appears to be 100% owned by GM. If GM "folds" as a business, does my manufacturer's warranty go bye-bye with it?
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    volvomaxvolvomax Member Posts: 5,238
    Generally speaking, when a manufacturer departs the scene, they have to make provisions to honor existing warranties.
    However, even if GM declares bankruptcy, they aren't going to fold up like Packard or Studebaker or Nash.
    They will remain in business much like one of the airlines.
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    solitaresolitare Member Posts: 1
    I want to purchase an extended warranty for my
    06 Camry. I have been given a price from Mercury Ins as much less then Toyota. Which kind of plan is better--Platinum, Gold or Silver?

    Is it safer to buy from Toyota even though the price is more?

    Thanks

    BMom
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    carrgdeprcvrcarrgdeprcvr Member Posts: 1
    What was the source of this long read? It looks like this would be some useful material for our receiverships of these RRGs and the obligors (warranty or vehicle service contract companies) they insured.
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    superoceansuperocean Member Posts: 8
    I wouldn't touch an extended warranty from anyone else than the manufacturer. If you offer anyone EW without seeing the car and it's condition, then you aren't doing business to protect and offer services, but to just get peoples money and jump ship once you have the money.
    Get a discounted manf warranty online from auth dealers who sell warranty in quantity online. That's what i'm going with. Saved me $$ too.

    IMO EW business is the same as the subprime mortgage originators, 90s long distance telecom slammers, and acai berry trial offers.
    If you are not a big corporation that i can shame and sue in court, you aren't getting my business. I refuse to chase down lousy florida scammers :mad: who will have moved onto the next scam. How much can I get for gold hoop earrings from the 80s?
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