February 22, 2006

Extended Warranty Association:

A new trade group aimed at vehicle service contract administrators plans to focus on certifying inspectors and other business issues, leaving the lobbying and legal efforts to others. But is that enough to attract the big industry players?

As warranty professionals prepare to gather next week in Las Vegas for the second annual Warranty Chain Management Conference, a question sure to be on the minds of many attendees is "what's next?" Do we immediately begin the planning for next year's conference, or should the growing community of warranty professionals look for something more permanent and periodic than a single annual meeting in a warm, sunny city?

During the morning of the second day of the conference, in fact, Glen Griffiths of Hewlett-Packard Co. is giving a presentation entitled "Warranty Industry -- Where Do We Go from Here?" It's part of a panel of presenters such as Joe Barkai of Manufacturing Insights and Tom Bellinger of IBM who will be detailing their respective efforts towards warranty community-building, some of which Warranty Week wrote about in the January 18 issue.

Two weeks after that article appeared, a flyer arrived heralding the launch of the Second Annual Vehicle Service Contract Administrator's Conference, scheduled for November 8 at the Mandalay Bay Resort in Las Vegas. As with the first annual conference, the meeting is to be held as a one-day pre-show event attached to the F&I Conference, which itself is already heavily attended by people from the extended warranty industry such as auto dealers, administrators, and underwriters. And as with the first annual event, this year's show was being organized by Eric Maerker, the founder and president of the consulting firm Warranty Risk Services LLC.

Auto Extended Warranty Group

What caught our eye was item number two in his flyer, which noted the proposed formation of a new trade association for vehicle service contract administrators. Maerker said the idea for such an association was born at the first Vehicle Service Contract Administrator's Conference a few months ago. But actually, he said the first service contract administrator's conference and association he knows of took place a decade before, in the mid-1990s in Los Angeles. An inspection company run by a man named Jim Hanes put together an annual meeting of administrators that grew into a loose association. It lasted two years.

The actual planning for last year's inaugural Vehicle Service Contract Administrator's Conference began in 2004 when Maerker said he detailed some of his community-building ideas to a small circle of people. Then he told more people at the National Automobile Dealers Association annual convention in early 2005. One of the people who heard his pitch was David Gesualdo, the associate publisher and national sales manager of F&I Management & Technology magazine, which produces the F&I Conference.

"David told me that they already had time set aside at the F&I Conference," Maerker told Warranty Week. "One day had been set aside for private meetings. He said he thought it would be a perfect venue [for a vehicle service contract meeting], and he saw it having a great synergy with the conference they were already doing. It would just bring more people from some of the same companies that were already participating."

As a consultant to the VSC industry, Maerker said he is serving as the "point man," to move the idea of an association toward reality. So far, he has a name -- the Vehicle Service Contract Administrator's Association -- and a Web site at vscaa.org. "We're not very far down the road yet, but there is a group of interested parties that want to do this," he said. There are approximately ten other individuals who have expressed a desire to develop the idea, he added, although they prefer to remain nameless until there's a formal launch. Their next steps will include an organizational meeting to establish that formal organizational structure and to decide upon future initiatives.

Competitive Pressures

Maerker said that when he launched Warranty Risk Services LLC, he wanted his new business to be affiliated with some kind of national association. But the more he searched for one, the more certain he became that one didn't exist. He said he's not sure why there's no group for the wider warranty industry, but at least within the small circle of vehicle service contract administrators, the reason is competitive.

"There's such a competitive nature between administrators," he said. "Each of them feels their practices are very proprietary. So they're very reluctant to associate together. I think it takes a person like me -- a third party -- to bring them together."

One of the main purposes of the association will be to improve the tools, training and resources available to the administrative professionals that make vehicle service contract products and services happen, Maerker said. Through the annual VSC Administrator's Conference, the group will "continue to provide an opportunity for the exchange of ideas in a desirable location, as we did in Las Vegas in November," he said. The scope of association will included the specialized disciplines of claims administration, underwriting, actuarial and premium processing and compliance.

An example of the kind of cooperative work that the members of the VSCAA might be involved with is a cooperative and coordinated effort to certify claims inspectors, Maerker said. Most VSC administrators send independent inspectors to inspect and verify mechanical breakdowns during the process of adjusting some of their claims. Typically, the inspector is asked to determine the cause of failure. Inspections are often performed on high-dollar claims.

"The inspection reports generated during a claim inspection are often used to defend appropriate claim declinations in the event it is contested later," Maerker said. "While most inspectors are technically qualified to do their jobs well, they are often not so skilled at articulating their findings. Also, they are not always mindful of the way their words can be used in a legal setting long after they have inspected the claim. A few of these independent inspectors are not really qualified to determine the cause of failure.

"As an association we would work to provide training resources for inspectors," he added, "designed to improve the quality of inspection reports they provide. We would also seek identify and certify those individual inspectors who possess the necessary training, knowledge and experience to provide us with good inspection reports. We believe that the whole VSC industry will be better served by certifying independent claims inspectors and using only certified inspectors."

Not the New Sheriff in Town

Beyond the proposal to certify claims inspectors, Maerker seems more sure of what the association will not do as opposed to what it actually will do. First and foremost, the VSCAA will not function as a kind of sheriff that brings law and order to a sector of the warranty business known for its scoundrels. While Maerker conceded that the adverse publicity brought upon the industry by unjustly denied claims and spectacular bankruptcies hurts all the legitimate businesses too, he said that's not an area in which there's much he can do.

Maerker said there also is no thought of establishing any kind of ratings system for auto extended warranty sellers and claims administrators. "The association would be intended to serve the interests of each of the individual members to the optimum," he said. "A ranking like that would probably cast some of the members in a bad light, and others in a good light. So I don't think that will happen. It would be more along the lines of raising the water level for everyone, so all the ships are floating higher."

The association also won't grow into a more broadly focused group that also serves the interests of other stakeholders in the auto extended warranty chain. For instance, auto dealers who merely sell extended warranties are not expected to join the association, but those who both sell and administer service contracts will be welcome. As the group's name states, it's being created by and for vehicle service contract administrators.

Sharply-Drawn Borders

Maerker also is drawing fairly sharp borders for the association in terms of the types of products it will cover. In theory, at least, by vehicles he means anything that moves on wheels. But in practice, the administrators he's making the pitch to are writing service contracts primarily for passenger cars and light trucks, with a smattering of interests in recreational vehicles, emergency vehicles, commercial vehicles, buses, and heavy trucks.

And while several administrators and underwriters have interests in both auto and non-auto markets, the VSCAA will be focused on vehicles. For instance, even within the home warranty industry there are independent inspectors who go out to take a look at damage and adjust claims. Some of their issues with training and certification might be identical to what's addresses by the VSCAA. But Maerker said any activities in that regard will have to be handled by another association that's focused on appliance service contracts and/or home warranties.

"Right now, all we're trying to do is meet the needs of vehicle service contract providers. What happens in the future as far as rolling others into our association, it certainly is possible, but it's not in the scope of our initial steps," Maerker said.

The group also won't look towards the manufacturers of the vehicles to become members, except as it relates to their divisions or subsidiaries that sell and administer extended warranties for vehicles. But it won't have much to do with the issues surrounding basic product warranties, either automotive or not. So this effort isn't likely to grow into the kind of general-purpose, all-are-welcome kind of warranty industry association that people have been suggesting should be formed for the past year or two.

Service Contract Industry Council

The extended warranty industry, at least, already has a kind of general-purpose, all-are-welcome industry association in the form of the Service Contract Industry Council. The SCIC was formed in 1991 to work with state and national regulators and lawmakers to develop fair and consistent regulation to protect consumers, maintain a free market, and ensure the long term viability of the service contract business.

SCIC membership now includes companies which represent multiple facets of the service contract industry, including manufacturers, insurers, retailers, and administrators. With Timothy Meenan as its general counsel and executive director, the group has very successfully lobbied on behalf of its members, going as far as to help draft the actual language of some state laws that govern the extended warranty industry.

Maerker said he sees no overlap between the groups, and said he has absolutely no plans for his group to get involved in any way with lobbying or lawmakers. "The Service Contract Industry Council has done a remarkable job of creating a favorable regulatory climate across the U.S. for our products," he said. "Many VSC providers that are non-SCIC members have no idea the debit of gratitude they owe the SCIC." So there's no need for the VSCAA to duplicate those efforts.

"I don't expect that we will work on the same issues," Maerker added, "but I think that representatives from some of the companies that they represent would also be a part of our association. I expect that many SCIC members that sell vehicle service contracts will also become members of the VSC Administrator�s Association."

Meenan said he thinks that while the SCIC and VSCAA may be aiming at some of the same companies, they're really aiming at different people within those companies. "My sense is the people I have in the room are a different group of people than he has in the room, because his guys are more the hands-on business operations guys and mine are either the owners of the company or are the regulatory or general counsel," Meenan told Warranty Week.

Business vs. Government Focus

Meenan said he agreed with Maerker that the two groups will focus on different issues. "My impression is he's looking more at the business issues side of things," Meenan said. "We could focus on that, but we have chosen to downplay that and to focus more on the legislative, regulatory, and what I would call the traditional trade association goals," which he said is to work on efforts to shape the laws and regulations that affect the business of members.

"We feel as a group that our hands are so full with all the state laws that are popping up -- some bad, some good -- that it doesn't leave a lot of time for the business stuff," he said. "And, quite frankly, our members haven't requested it."

Meenan also warned that it's one thing for VSC administrators to launch a trade show, and it's another thing entirely to start a trade association. With the latter, anti-trust implications come into play if a group of competitors proposes to act in concert on any issue of common interest.

"It's one thing to hold a conference and let people get up and voice opinions," Meenan said. "But part of what you have to be careful of, with the business issues especially, is you have to be careful as a group, as a corporate body -- when you start acting as a corporate body, and you're a dues-paying member or a subscriber, the anti-trust guidelines are significant. And when you start talking about how to structure a specific product or program -- and you can't even get into the pricing -- those issues are gray areas."

Other Extended Warranty Groups

Meenan also was involved in the 1988 launch of the Florida Service Agreement Association. They have an annual conference (most recently in September at Walt Disney World) that roughly 50 companies usually attend. That group is unique in that it's focused on a single state market for multiple types of service contracts. Meenan said it was launched in response to some tough state laws in Florida which classify service contract providers as specialty insurers, and which therefore has some significant regulatory hurdles. To this day, both Meenan and his law partner F. Philip Blank continue to be registered as lobbyists on behalf of the FSAA in the state of Florida.

Meenan noted that although he wasn't involved, there's also a Home Warranty Association of California that launched in 1984. As its name implies, the group is focused on home warranties in a single state, and its membership includes just seven members. However, those seven members claim to be the largest home warranty players in the state. The HWAC estimates that those seven members issue 95% of the home warranties sold in the state of California, and they further estimate that more than 90% of all existing home sales in the state are sold with a home warranty contract in place. So we're talking about something on the order of a half-million home warranties, just in California.

Beyond this pair of associations, however, Meenan said he can't think of any other state or national warranty or extended warranty group. Part of the reason, he said, is that for any association to be successful, it has to represent a significant portion of its industry, not so much in terms of members as in terms of market share. Clearly, if the SCIC represents 80% of the national service contract market and the HWAC represents 95% of the state home warranty market, they've exceeded that goal.

"The hard part is getting the significant players in the industry to buy into it and become members," Meenan said. "That's why the SCIC is the Vehicle Service Contract Administrators Association already." He estimated that the current members of the SCIC provide around 80% of all the vehicle service contracts issued annually in the U.S. "So he doesn't have to convince me; he has to convince them to join a second trade association."

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