For service contract buyers, the price of the protection plan as compared to the price of the product it covers is one way to measure its value. But for service contract administrators, their profitability will be determined by a simple measure of whether or not they covered the risk by charging enough. And that has more to do with the cost and likelihood of repairs than with the list price of the product.

When Allstate Corp. announced last week that SquareTrade lost money for five consecutive years, we again wondered if perhaps their service contract prices are too low to cover costs. And if they are, does that mean they represent a bargain to their buyer?

Before we can answer such an enigma, there's an even simpler question that needs to be answered: What do service contracts cost? To answer that question, for weeks we have been shopping around for both products and protection plans, and then comparing the price of each. We started in October with consumer electronics, and this month we switched to major appliances.

This week's mystery shopping expedition began with a search for clothes washers and dryers and service contracts sold by 16 major retail chains: Abt Electronics Inc., Amazon.com Inc., Best Buy Co. Inc., BrandsMart USA, eBay Inc., hhgregg.com (Gregg Appliances Inc.), Home Depot Inc., Kmart (part of Sears Holdings Corp.), Lowe's Companies Inc., Menard Inc., Newegg Inc., PC Richard & Son, Buy.com Inc. doing business as Rakuten.com, Sears Holdings Corp., Target Corp., and Wal-Mart Stores Inc.

Of the 30 retailers where we shopped for consumer electronics items and service contracts last year, we could not find price data for washers, dryers, and service contracts in 14 of them. At Costco and Sam's Club, non-members could not see the prices of the washers or dryers ahead of time. At BJ's Wholesale, Conn's and QVC, customers could not see the price of the service contracts ahead of time. At Adorama Camera Inc., B&H Photo & Electronics Corp., Crutchfield Corp., GameStop Corp., Micro Center, Office Depot Inc., Staples Inc., Tiger Direct, and Toys R Us Inc., washers and dryers were not offered for sale.

Top Appliance Brands

At each retailer, we shopped for two brands of washers and dryers: LG (made by LG Electronics Inc.), and Whirlpool (made by Whirlpool Corp.). As with dishwashers, we tried to include a third option in Frigidaire, but neither it nor parent company Electrolux AB had a major presence in either washers or dryers. Also, none of these brands were offered at either Target or Walmart, so at those locations only, we substituted others such as Haier. In Figure 1, we've tallied up the number of units surveyed for each brand.

More basically, we considered whether to survey clothes washers and dryers together or separately. Many retailers offer bundled sets of each at a special price. Indeed, some sell stacked units of both that are physically attached -- one above the other. And some sold washers and dryers that were identically priced, though each could still be purchased separately.

However, we wanted to see if there was a meaningful price difference between the washers and the dryers. But we didn't want to consume two weeks of newsletters to do so. After all, the Warranty Chain Management Conference is less than eight weeks away, and after that we will want to take a multi-week look at manufacturers' product warranty data. So time is short.

We therefore shopped separately for washers and dryers, and did not price any bundled sets or attached units. But for each washer we priced, we tried to also price a comparable dryer. It still didn't quite work out evenly, as Figure 2 details. We ended up with eight more price pairs for washers than dryers.

For each unit, we noted the price of the product and the price of the service contracts offered alongside it. We began at the $400 level, and worked our way up to the $1,600 level in increments of $200, looking for at least one washer and one dryer priced within each price band. This means that at some of the best-stocked retailers, we ended up shopping for as many as 16 different models.

For washers, we considered both top-loading and front-loading models. For dryers, we tried to stick to electric-powered models, but in some cases we had to price natural gas-powered units. We didn't include or exclude any other features or attributes. But we always excluded the price of installation, shipping, delivery, removal of the old unit, taxes, or additional parts or accessories.

Product Price Tiers

Overall, the prices of the washers and dryers fell into one of three different buckets. The inexpensive units were priced below $700. The most expensive units were priced above $1,000. And the mid-priced units were in between. Figure 2 details the suggested retail price of the 364 units surveyed.

Next, we collected and noted the price of all the service contracts offered alongside the washers and dryers. But there were no service contracts offered for six of the units we'd priced. Of the remainder, we found just as big a range for the price of the service contracts as we did for the price of the products they protected. At one extreme, Target wanted $39 to protect a $280 Haier washer for two years. At the other extreme, Sears wanted $430 to protect a $1,618 LG washer for five years.

Most retailers offered two service contracts per unit, usually differentiated by their duration. The most common pairing was three and five years. But eBay offered three years only. Target and Walmart offered two-year terms only. And PC Richard offered terms of two, three, five, or 10 years.

Service Contract Teams

For washers and dryers, we found retailers to be working with one of five different third-party companies: Best Buy and Newegg worked with AIG; BrandsMart USA, hhgregg, and Menard's worked with AmTrust Financial Services Inc.; Lowe's worked with Assurant Solutions; Home Depot and Walmart worked with Asurion; and Abt, eBay, Rakuten, and Target worked with SquareTrade Inc.

Usually, the same team of administrator, obligor, and underwriter was always working together. For instance, AIG's underwriter was always Illinois National Insurance Co., and AmTrust's was always Wesco Insurance Co. And they also owned the administrators they worked with. However, Asurion worked with either CNA or The Warranty Group as underwriters, depending on the client, and SquareTrade worked with both CNA and Starr Indemnity & Liability Co., depending on the client.

Also, Amazon.com splits its washer and dryer service contract business among at least two companies: AmTrust and SquareTrade. Usually, at least for washers and dryers, the same administrator would offer three- and four-year plans for a given unit. But in a few cases, the three-year plan was administered by one company while the four-year plan was administered by another. This was the only instance where there was competition within the retailer. Usually, each administrator has a monopoly on a given unit at any given point in time.

In Figure 4, we've counted up all the durations of the service contracts offered. Notice there were no one-year contracts (that initial year would be covered by the product warranty in most cases). And besides PC Richard, hhgregg and AmTrust were the only other service contract providers willing to sell a 10-year protection plan.

With 358 product-protection plan pairs in hand, we had a pretty good base of data on which to perform some analysis. We had two big questions. First, did providers price the service contracts for washers and dryers the same, or differently? And second, was there any relationship between the rising price of the products and the corresponding price of the service contracts?

To find out, we separated our group of 358 price pairs into one list of washers and one list of dryers. And we separated our group into low, medium, and high-priced units. But first, we had to figure out some averages.

Average Price of Protection

Overall, we found that for both washers and dryers, the average price of a service contract was just under 17%. This is somewhat lower than the average we found in last week's newsletter for dishwashers, but is in the middle of the range we found for consumer electronics items last year.

In Figure 5, we've charted the overall averages based on the duration of the service contracts. As one would expect, the longer the term, the higher the price. Well, that relationship works except for the four-year plans, which turned out to be a bit less expensive than the three-year plans. We think it's merely an aberration, because in this product category Abt Electronics was offering lots of inexpensive four-year plans on high-priced units, which pulled down the overall average.

Overall, the two-, three-, and four-year service contracts were priced below the 17% average, while the five- and 10-year plans were priced above it. With this product category, the 10-year average of 24% was far below the same metric reported last week for dishwashers, probably because hhgregg was also selling them in addition to PC Richard. However, at 11%, the two-year average was also lower. And there was no one-year data at all.

And that brings us to results for the two big questions we wanted to answer. For our first question, the answer was a bit mixed. Overall, we found that washer service contracts were indeed priced slightly higher than dryer service contracts, as a percentage of the price of the product they protected. For washers, the average price was 17.2% of the product price, while for dryers it was 16.5% of the product price. And then the overall average was just under 17%.

However, that relationship did not hold for all contract durations. While it was true for three- and five-year contracts, for two-, four- and 10-year contracts, the ratio for washers was actually a bit lower than for dryers. But going back to Figure 4 for a second, because the three- and five-year plans were more numerous, and because the washer-to-protection plan ratios were higher for those terms, the overall average was also higher for washers.

We asked this question because as we said at the outset, many retailers seemed to want to actively twin washers and dryers in the minds of buyers, selling them side-by-side at identical prices, or even offering discounted bundles. But even in those cases, there was usually a few dollars difference between the price of the service contracts for each. Were the actuaries who price these contracts inadvertently transmitting their expectations for future claims cost?

Protection for High-Priced Products?

Our second question had to do with the ratios for different price tiers. Were the service contracts for high-end units priced differently than for low-end units? What we did to answer this question was to split the group of 358 product-protection plan pairs into under $700, $700 to $1,000, and over $1,000 subgroups, and recalculate all the averages outlined in Figure 5.

In a handful of cases, we had only six or eight data points in a particular category, such as mid-priced units with two-year service contracts. But there were a sufficient number of data points in the others to allow us to make some general observations.

So yes, there is a difference in the price of protection, depending upon the price of the product. Of the 114 units priced below $700, the average price of protection was 21%. Of those units priced over $1,000, the average price of protection was 14%. And then the group in the middle was close to the overall average.

Furthermore, this relationship held at all contract durations. In other words, the low-priced units had higher-than-average-priced protection plans at two, three, four, five and 10 years. And the high-priced units had lower-than-average-priced protection plans at two, three, four, five and 10 years.

We think this proves that the price of protection, although it is closely linked to the price of the product (some providers use pricing bands exclusively), also takes account of the cost and likelihood of claims. In other words, the cost of protecting a $1,600 dryer is not twice the price of protecting an $800 unit. So why should the price of their respective service contracts have a two-to-one relationship just because the products do?

The relationship doesn't always hold. For instance, for the 97 products priced between $700 and $1,000, the outcome is mixed. At two, three, and 10 years, the average protection plan price is lower than the overall average. But at four and five years, it's higher.

Profit and Loss?

It probably makes sense to note here that the average price of the 358 service contracts was $145. That doesn't mean the predicted cost of claims is $145 per unit, because it also includes sales commissions and hopefully profits. But it does suggest that from an actuarial point of view, there's a stronger relationship between the price and the cost of protection than there is between the price of the product and the corresponding price of protection.

What we see is that in general, high-priced washers and dryers with short-term contracts have the lowest prices for protection plans, while low-priced units with long-term contracts have the highest prices for protection plans. For instance, Newegg.com offered a $1,650 washer and a $1,650 dryer with two-year protection plans priced at only $110 (or 6.7%). But at the other extreme, PC Richard wanted $230 to protect a $400 dryer for 10 years (a 58% ratio), and it wanted $250 to protect a $400 washer for 10 years (a 63% ratio).

For careful shoppers, there are bargains to be found. For instance, Abt offered a washer/dryer pair priced at an identical $1,619 each. SquareTrade's corresponding four-year protection plans were priced at $100 each, which is only 6.2% of the unit price. And again, as we've said in past weeks, this illustrates how important it is for consumers to do their research about not only the price of the products they want, but also the protection plans they might buy.

You cannot say the price of a service contract is always or never lower than the frequency and severity of a possible claim. The honest answer is it always depends on the retailer and the service contract administrator the retailer chooses to work with. While some of these sellers are price gouging their way to profitability, others are probably losing money on every service contract they sell.