Preventing Warranty Fraud:
Warranty analytics is the key to detecting and preventing dealer and servicer fraud. This article provides a complete guide to warranty fraud -- what it is, why it's happening, and how in-depth warranty analytics can address it.
Occupational fraud, which includes dealer or servicer fraud, is defined by the Association of Certified Fraud Examiners (ACFE) as:
"the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets."
The size of dealer and servicer fraud in the U.S. is substantial. Although the true size of warranty fraud is unknown (a large number of fraud cases are never reported) warranty fraud is estimated to be as high as 10% of warranty expenses or 2% to 4% of company revenues annually. With total warranty expense by U.S.-based companies at $26.1 billion in 2018, dealer/servicer fraud can be estimated at $2.61 billion annually.
Manufacturers face many types of dealer and servicer fraud, including but not limited to: over-charging for repair, conducting repairs right before warranty period ends, replacing parts instead of repairing them, charging the manufacturer and consumer for the same repair, making false representations of part quality, substituting lower cost parts in order to maximize margin, submitting multiple invoices for parts/work, and submitting false or inflated invoices.Read more
Warranty & Corporate Inversions:
Although warranty has an effect on taxes, the movement of a company's headquarters from a high-tax to a low-tax country doesn't seem to change its warranty claims or accrual rates. The merger of product lines has a much bigger effect, no matter what their nationality. But in at least one case, a company leaving the U.S. decided to cease complying with warranty reporting rules.
In last week's newsletter, there were several solar equipment companies profiled that were incorporated in one country, had their headquarters in another country, and sold their stock in New York. Several were startups from Asia, which had acquired small U.S. companies in order to gain their stock listings.
This, we said, could prove troublesome if any of the companies failed to outlive their extra-long warranties. However, this globalization of warranty liabilities is not all happening in one direction. An increasing number of U.S. companies seem to be re-incorporating themselves in Bermuda, Ireland, or some other business-friendly nation, appending a "PLC" or an "Ltd" to their name, and continuing business as usual.
Most are moving abroad for tax reasons. For instance, the corporate tax rate in Ireland is 12.5%. It's 35% in the U.S. Therefore, by acquiring an Irish company and moving the official headquarters of the combined companies to Dublin, a formerly U.S.-based company could cut its nominal tax rate by almost two-thirds (not counting deductions).
Since the disclosure of warranty expense information is a requirement of U.S. Generally Accepted Accounting Principles (GAAP), we wanted to see what effect this new kind of corporate emigration is having upon those disclosures. Changes in warranty accrual rates affect net income, and therefore have an impact on taxes. Warranty claims payments include parts affected by sales tax or VAT, and labor affected by payroll taxes. So there are clear links between warranty and taxes. But while these corporate inversions have a clear impact on tax rates, do they also have any impact in warranty expense rates?Read more
Solar Equipment Warranties:
While product warranties that last for one or two decades are reassuring to buyers, they're not worth much unless funds are available to pay claims. That means betting on young startup companies eventually becoming old industry veterans. But who knows how reliable a system installed now will be in 10 or 20 years, and how much it will cost to repair or replace?
The solar energy equipment market is growing fast and that growth is attracting more competitors and more manufacturing capacity, forcing product prices to fall rapidly. New market entrants with unknown brand names are reassuring customers that their equipment is built to last, issuing 10-, 25- or even 30-year product warranties as a mark of their expected longevity and reliability.
But are these warranties really built to last? Are the companies issuing them to customers actually setting aside enough money to pay claims in two or three decades? And what happens if the fierce competition forces some of them to go out of business?
In general, what we're finding is that most of the manufacturers are financing their very long warranties properly, while most of the installers are playing for the short term, hoping that the manufacturers will be there to pay at least the cost of replacement parts. And if not, well, let's hope they can work something out.Read more
Appliance Service Contract
Though the market has remained relatively flat for years, market shares are changing as online sales are gaining and new players are emerging. Still, six underwriters control 90% of the market share.
In our series of articles on the major appliance service contract industry back in early 2011, we neglected to include one important item: a market share report. Seven consecutive weekly newsletters explored the history of ServiceBench Inc., GE Appliances, Lowe's, and Abt Electronics and Appliances, among others. But before we could get to the pie charts, the calendar mandated that coverage of the Warranty Chain Management Conference needed to begin.
After that was done, we never went back to finish the series.
This week, as part of our current half-year of service contract industry coverage, we'll fix that oversight and provide some details on appliance service contract market sizing and market share. But we'll admit to one major problem: seven of the top ten retailers of service contracts for major appliances sell considerably more service contracts for consumer electronics, mobile phones, and/or home computers. Separating those segments therefore required some heroic assumptions to be made.
So what we're going to say is that our estimates are rough on both edges. They're rough in terms of estimating the amount of premiums paid by consumers for their service contracts, and they're rough in terms of what kind of product the consumer protected with a service contract when they shopped at Best Buy, Home Depot, Lowe's, Sears or Wal-Mart.Read more
As with luxury cars, we're finding that the smarter the phone and the more advanced its features, the higher the warranty costs. And some of the smartest phones with the biggest market shares are now driving up the warranty costs of their manufacturers.
The smarter the phone, the harder they fall. As these little computers get more compact and sophisticated, their warranty costs are escalating. And it's beginning to hurt some of the largest players.
Two weeks ago, we found that some of the most luxurious passenger cars with reputations for high quality also had relatively high warranty costs. That's not supposed to happen. High quality means low warranty costs, no?
With smartphones, it seems to be a different problem. These units are sophisticated devices that aren't meant to be dropped, sat upon, or left out in the heat, cold, or humidity. But they're also meant to be portable and always available, so abuse and misuse are inevitable.
We just collected some new warranty data that illustrates the problem. Research in Motion Ltd., or RIM, is the Canadian company responsible for the BlackBerry product line. In its most recent fiscal year, warranty claims cost more than seven percent of the company's revenue. And that was the fifth straight year in which warranty costs rose as a proportion of revenue.Read more