An extended warranty, sometimes called a service agreement, service contract, or maintenance agreement, is a prolonged warranty offered to consumers in addition to the standard warranty available on a new item. The extended warranty may be offered by an insurer, a retailer, or a manufacturer.
Extended warranties are taken out by consumers as protection against the failure of, or damage to, the new item after the manufacturer’s guarantee has expired. It may be a renewable annual contract or a policy for a fixed period.
Types of Goods Covered by Extended Warranty Insurance:
- Mobile phones
- Electrical products
- Motor vehicles
- Furniture
- Boilers
- Conservatories
Extended warranty insurance policies are often based on the principle of indemnity. In the event of a valid claim, the insurer is obliged to put the consumer back in the position they were in prior to the loss or damage. This can be achieved by making the necessary repairs, replacing the item, or offering a credit note or cash settlement.
How is Warranty Management Handled?
Warranty management is often handled by multiple departments within an organisation and potentially third parties in the supply chain.
This includes:
- Product registration
- Claims processing
- Product returns
- Product repairs
Often, the process lacks a central point with assigned overall responsibility, and the various process stages are rarely effectively joined up.
Vulnerabilities in Warranty Management:
- Lack of visibility across the warranty management process.
- Absence of shared data related to warranty claims.
These issues make warranty insurance an attractive target for fraudsters. Warranty fraud can take the form of:
- Opportunistic fraud by consumers.
- Organised fraud by criminal gangs.
- Exploitation by unethical service partners within the warranty management supply chain.
Impact of Warranty Fraud:
- Fraudulent warranty claims can account for up to 15% of the overall warranty costs.
- Businesses can lose up to 5% of their annual revenue due to fraudulent claims.
Many organisations are unaware of the scale of their warranty fraud exposure. Others may choose to write off the cost rather than risk impacting consumer reputation and relationships with business partners. Even when fraud is suspected and identified, organisations often struggle to produce the evidence necessary to repudiate claims.
Key Areas of Warranty Fraud (According to PwC Research):
- Non-returns or advance replacement exploitation.
- Claims by third-party service providers for services never performed.
- Under-coverage (misapplication of entitlement).
- Just-in-time coverage (cover purchased after the item has already been lost or damaged).
- Buy one and sell several (unethical third-party service providers buy a small number of valid warranties, then resell them to several customers. Claims are submitted for covered products when the work or replacement is related to products without a valid warranty).
Top 5 Warranty Management Vulnerabilities:
- Inadequate entitlement verification.
- Weak user authentication.
- Poor management of returned merchandise.
- Improperly input base data (sale, service contract, serial number).
- Lack of control or visibility into third-party service providers.
Minimising Exposure to Warranty Fraud
Steps to Reduce Fraud:
- Adopt a Zero Tolerance Strategy:
- Send a powerful signal throughout the organisation and its supply chain.
- Assess the Warranty Management Process:
- Identify weak links.
- Tighten process controls.
- Ensure continuity of data throughout the warranty life cycle.
- Equip Claims Teams with Counter-Fraud Tools:
- Enable swift anomaly identification and investigation.
- Leverage Data:
- Effective data management is crucial for detecting and preventing fraud.
Industry Collaboration:
As with other lines of insurance, a shared, cross-industry warranty insurance claims database could:
- Provide a single consolidated view of a claimant and their claim history.
- Improve data validation.
- Identify serial claimants.
- Detect fraud trends and organised crime activity.
Building such a system would require industry collaboration, led by an organisation with experience in similar projects and the appropriate market expertise.
CRIF’s Role in Combating Warranty Fraud
CRIF has supported the UK insurance industry for over 20 years by developing centralised databases in sectors such as motor, household, personal injury, and pet insurance.
CRIF’s CACHE-CUE System:
- Holds over 7 million household claims.
- Holds 11 million motor claims.
- Holds 12.5 million personal injury claims.
