April 29, 2010

RV Service Contracts:

Perched as it is at the junction of homes and vehicles, the RV industry has been hard-hit by the recession and the credit crunch. But the sellers of RV service contracts may have been helped by all that uncertainty, offering peace of mind to an industry full of turmoil.

One would think that the recreational vehicle service contract industry, which protects vehicles best described as a home on wheels, would have been savaged by the downturn in both the home and wheel industries.

The past two years have been especially rough on the manufacturers of high-end RVs, with several falling into bankruptcy and then into liquidation proceedings. But that's actually turned out to be somewhat positive for the appeal of service contracts. Yes, fewer units are being sold, but customers worried about their product warranties may warm up to the peace of mind available through service contracts.

In fact, several companies have reported growth not only in the early months of 2010, but also in the dark days of 2009. One company focuses primarily on the membership of its RV club. Another focuses on renewals and direct sales to consumers. Both still use RV dealers as a sales channel, but there's not going to be a recovery in service contracts in that channel until there's a recovery in unit sales.

Focused on Existing Owners

Scott Blanc, vice president and general manager of Affinity Ventures, said the nature of his company's business probably helped to shield it somewhat from the effects of the recession.

Rather than focusing on RV dealers and attaching service contracts to the sale of new units, the Affinity Group is focused on the owner through its Good Sam Club.

"Our customers are really not necessarily the people that are out there buying a new or a pre-owned RV," Blanc said. "These are people that are already in the lifestyle, people that are committed to the lifestyle."

Affinity Group is the parent company of Affinity Brokerage Inc., which sells the Good Sam Extended Service Plan, which is technically a mechanical breakdown insurance policy rather than a vehicle service contract. The Good Sam Club, meanwhile, is a 40-year-old RV membership group with around a million members. Other divisions of the Affinity Group run RV resorts and publish RV-related magazines.

Business Is Up

Blanc said that as a result of this focus on the RV owner, the company's direct-to-consumer service contract business was up 11% last year and continues to be up this year. Though the club has been around for 40 years, they didn't begin selling service contracts until about 12 years ago. Policies are administered and underwritten by QBE Insurance (Europe) Ltd., a Sydney-based insurance company with its Americas headquarters in New York and an office located near Denver to handle the Good Sam line of business.

Even the relatively small amount of service contract business coming into Good Sam through RV dealerships is up in 2010, Blanc said. "That channel dropped to just a trickle last year," he said. "It really dried up as a viable channel, even though our direct-to-consumer channel still remained very strong. The distribution through the dealerships was almost down to nil. But we've seen that start to revive this year. In the last two or three months, we've seen good steady increases in sales of service contracts through the dealers."

The Good Sam Club direct sales channel, meanwhile, deals with people who 1) already own an RV and 2) already do business with the company. "So we've got a relationship with them," Blanc explained. "They may not be buying a new RV this year, but they're still active in the lifestyle. They're still going to use that RV. Maybe it's getting a little bit older now, since they haven't traded it in. So there's probably an even greater need to protect it with a service contract."

Recovery Mode

Even in the hard-hit cities of northern Indiana, where many of the RV and trailer manufacturers are based, growth is staging a comeback. Steve Burgess, president of the ACC Warranty Group, said the recovery is now in full swing, at least at his company.

Steve Burgess

"Things have really picked up for us," Burgess told Warranty Week. "We have already surpassed all of 2009 here. So it couldn't be better, compared to last year."

ACC is a broker for five different RV service contract programs. Some are sold through RV dealers. Others are designed for direct sales to consumers, or they focus primarily on the renewal business.

However, Burgess noted that his company generally focuses on the high end of the RV industry -- more towards the larger diesel coaches and less so for the towable travel trailers and the units with the pop-up or slide-out rooms -- so its encouraging results may not be indicative of the industry as a whole.

"Our customers are more committed to the lifestyle, if you will, not just as a recreation," he said. And the coverage plans that ACC sells, and therefore the claims that result, have more to do with the "home" systems of the RV than with the "vehicle" components. It's literally a house on wheels, subject to hurricane-force winds (at least where the local speed limit permits).

Parts & Mobile Repairs

To help control claims costs, Burgess said, ACC recently launched its own parts and service facility as well as a fleet of mobile claims trucks. "So we're now able to solve claims for our insurers, to help mitigate their loss cost," he said. "We own the reinsurance on a couple of our programs, so anything we can do to mitigate losses really boosts our reinsurance profits."

The new ACC Mobile RV Service includes an RV parts management system for field technicians, as well as mobile RV repair trucks that are capable of driving right up to a covered unit and affecting repairs on the spot. Along with the parts and the trucks, ACC has also launched a new web interface, which allows customers to file claims, check on the status of their repair requests and order parts directly from their computer or web-enabled mobile phone, Blackberry or iPhone.

"Many of our customers live in their RV for an extended period of time and it is unreasonable to expect them to drop off their home at a dealership while waiting for common repairs to be completed," Burgess noted in a press release about the new service. "We want to ensure that this program encompasses all of the key functions that a mobile RV technician relies upon to complete a successful service call in one-visit. Our mobile repair trucks are being outfitted with all of the equipment that a fixed service operation would have on hand in order to accomplish this."

House Calls Away From Home

Burgess said the "we'll come to you" aspect of the new service fits in with the nature of the RVs and their owners. While most passenger car claims generally occur within a hundred miles of home (and therefore also close to the dealership that sold the vehicle and its service contract), RVs can break down thousands of miles from home, literally in the middle of nowhere.

"It's not just for the major failures: the transmissions, rear ends and engines," Burgess noted. "If you're at the Grand Canyon and your air conditioner quits working, or your toilet breaks, that's going to be a trip interruption trigger, because the coach isn't livable at that point."

So a lengthy wait for parts can involve multiple nights in a motel, plus meals and possibly a rental car -- most of which is covered by the trip interruption clause in the service contract. Just being able to find parts and get them out faster will reduce the cost of the claim. Being able to roll a truck to do the repair in a campsite at the side of a lake is going to boost customer satisfaction too.

"We got the parts and service center up at the end of February, and we just got the trucks launched the first of this month," Burgess said. "It's been a huge success so far, even though we're only two weeks into it. It's been very well-received, by both consumers and the dealers."

Still Slow at the High End

Burgess said the recovery in vehicle sales so far has been most pronounced at the low end of the market, with the towables and the pop-up units. Motor home sales are still at historically low levels, and the high end of the market is still suffering from the collapse of several major manufacturers, the credit crunch, job losses, etc.

"I just came from an RV show out west," Burgess noted. Three years ago, the exhibitors sold 40 units during the show. This year, they sold only four units, he said. And they were happy to have sold any.

But all that uncertainty may have actually increased the appeal of RV service contracts, Burgess suggested. "Our attachment rate is way up -- over 20% since the failures of Fleetwood, Monaco, Country Coach, Holiday Rambler, and so on. Our attachment and our price per contract are both up," he said.

Part of the reason may be the fears that the collapse of the manufacturers created, he said. "Consumers have always banked on the manufacturers being there," Burgess said. "That was never a question." And they were always skeptical about the longevity of their service contract provider. But they never thought their product warranty would become worthless.

Now that's changed, and a fully-insured RV service contract looks like a safer bet for the long term than a manufacturer's product warranty. In fact, in the June 11 newsletter last year, we wrote about how some RV dealers were selling service contracts for a dollar to help increase the appeal of otherwise as-is units made by bankrupt nameplates that were no longer paying claims.

Sales Declines Continue

Growth, however, is far from universal. For instance, the Asset Protection Division of Protective Life Corp., the parent company of the administrator of the XtraRide and Jayplus RV service contract programs, reported an 18.9% drop in service contract sales last year, following an 18% drop in 2007-08. Meanwhile, loss ratios for the service contract programs rose, from 66.4% in 2007 to 70.7% in 2008 and 82.8% in 2009.

Protective makes more than 90% of its service contract sales through dealers, so it's likely that the sales decline is directly related to the drastically reduced sales of new passenger cars, RVs, and other vehicles that the service contracts cover. But since RVs represented only around 8% of the company's total service contract dollars last year, the rising loss ratio is probably not due to any spike in RV-related claims. Though it's a small share of revenue, it's nevertheless a profitable line of business for the company.

There's just not a lot of information out there on RV service contracts. As in the mainstream passenger car service contract sector, many of the "advice" web sites turn out to be thin veneers for the salesmen. However, while keeping that caution in mind, some helpful advice about buying RV service contracts was posted several years ago at the New RVer.com web site:

Extended warranties provide
peace of mind to many RVers

Depending on what type of recreational vehicle you purchase, the cost to protect yourself from the high cost of repairs can vary by quite a bit. Here are some very general guidelines to let you know how different factors can affect your warranty cost:

1. Engine Type � Diesel engines will cost from $100 to $500-$600 more depending on their location (rear is more expensive).

2. Engine Location � Rear engines can run from $50 to $350 more for gas engines and about $300 to $600 more for diesel.

3. Engine Manufacturer - Most companies exclude Renault built engines.

4. Engine Features � Turbochargers will add from between $150 to $400 to the price of coverage. Some engine modifications can void warranties; generally these include items done to modify performance that are not factory (or factory-approved dealer) installed. Though these types of modifications are more common on automobiles, you should still be aware if any of them have been performed, especially on used vehicles.

5. Vehicle Age and Mileage � This seems a fairly obvious one, but you should be aware of the general guidelines. As the vehicle increases in age there is usually a surcharge added in for every year past the last couple (or few) years. These run somewhere between $25 and $150 for each year. With mileage, generally the surcharges start a bit earlier and are higher than you would expect to see in an automobile warranty. Usually there is a fairly low threshold (10,000 to 20,000 miles) after which there is usually a surcharge added, this is usually done in increments (e.g. 12,000-20,000; 20,000-35,000, etc.). These surcharges are usually higher than the year surcharges and run from $100 to $400. There may also be additional charges for things like seals and gaskets that range from $50 to $200. The age and mileage will also determine if you are eligible for bumper to bumper coverage if available (almost everything is covered) or major component coverage (most everything is covered but not to the same degree as bumper to bumper).

6. Accessories � You can expect to pay somewhere between $75 to $350 to add coverage for the extras (DVD, satellite dish, TV, stereo, etc.). This area of coverage can vary widely. Some contracts cover some but not all and some cover none. It will depend on these factors. There may also be charges to cover navigation systems separate from the cost of the above accessories.

7. Components � These things may or may not be included and will cost between $50 to $250 to add coverage for if not included: slide-out rooms, power step systems, leveling systems, and awning components.

If we were to rewrite these suggestions for a post-recession marketplace, we'd add more detail to points 6 and 7. For while these programs are sold as a type of vehicle service contract that also covers household appliances, the actual claims costs often make them seem more like home warranties that also happen to cover engines. And then there are items such as the leveling jack that are unique to RVs.

Some say half the claims cost arises from the "house" systems and half arises from the systems related to the "wheels". Others say it's more like 80% "house" and only 20% "wheels." But those ratios have a lot to do with the type of vehicle being covered, and whether it's driveable or towable, gasoline or diesel. Suffice it to say that these accessories and components are likely to be the cause of numerous repair events.

Trip Interruption Expenses

Also, if we were to add an eighth factor to the list, we'd suggest the buyer look long and hard at the trip interruption coverage. If your car breaks down, a friend can give you a lift to work and one of those web sites can get your groceries delivered. But if your RV has to go into the shop, you'll need a motel as well as food and transportation while you wait. And that may be the case for multiple days and can run into the multiple hundreds of dollars per day.

The New RVer.com web site suggests that readers purchase the Good Sam Extended Service Plan, which covers travel expenses of up to $100 per day for lodging, meals and rental car for up to 10 days if breakdown occurs more than 100 miles from home (anywhere in the U.S. or Canada).

The ACC service contracts have a $1,500 cap on trip interruption expenses, with reimbursements possible for up to $200 a day for up to five days -� $100 for lodging, $50 for food, and $50 for car rental. But to qualify, you must be more than 200 miles from home, and a repair facility must be keeping your RV in the shop overnight to repair a covered breakdown.

The XtraRide motor home programs sold by Protective dealers allows for reimbursement for meals and lodging expenses, as well as for items such as towing, substitute transportation, food spoilage, and other losses.

The maximum payment for meals and lodging is $200 per day for up to five days (eight days for the repair of a major component). And then there's a payment of up to $75 a day for a rental car, as long as the repair is expected to require eight hours or more of billable labor time. Time spent waiting for parts to arrive is not covered.

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