LLPW Products: Good Idea for VSC Providers?

Gary Fagg’s article in the August 2010 issue of P&A provided a wealth of information about the LLPW product. His article begs us to ask: “Why aren’t more VSC companies offering the LLPW product?”

From an actuarial standpoint, the main problem is risk management: When does the LLPW insurer know that the policy has earned out? When does exposure to potential claims expire?

From a dealer’s perspective, the problem is cost! Because federal law (The Magnuson-Moss Act) places constraints on warranties, purchasers cannot be responsible for the costs of a warranty product, as opposed to a vehicle service product or GAP product. Additionally, federal law requires that the dealer provide the warranty to all customers purchasing the vehicle.

Perhaps an even better question is, “Are dealerships reluctant to offer the product?”

In 2007, when Chrysler came out with its manufacturer’s Lifetime Powertrain Warranty (LPW) as a way to show confidence in the quality and reliability of their products, they added a stipulation that minimized the existing risk management problem that other powertrain warranty providers caught on to.

Most powertrain warranties come with conditions and exclusions. For example, they are not transferrable and exclude any repair that qualifies under another existing policy such as the original manufacturer’s warranty or a VSC purchased with the vehicle.

Chrysler, like many OEM’s and warranty providers, also required that the original owner completely adhere to the manufacturer’s maintenance plan and keep receipts and statements as proof of adherence to the plan.

What Chrysler added was the “five year, return to the dealer” condition that required the owner to return to a Chrysler dealership within 60 days of the vehicle’s five-year purchase date for an inspection. It was this additional condition that solved, or at least reduced, the risk management problem of determining when a policy would be considered void, and hence, opened the door for other insurer’s to offer similar products.

Because the dealer is required to absorb the costs of the warranties, applicable to every vehicle it sells, the potential cost can be overwhelming – even if providers offer the LLPW product at a reasonable cost. But, offering this product, either by way of the manufacturer or a third-party insurer, can be a great selling point for the dealer, not to mention additional income for the service department. Finally, the “five year, return to the dealer” condition could result in new vehicle purchases.

Despite some dealers’ reluctance to offer LLPWs on their vehicles, those who do are seeing the benefits of increased vehicle sales and customer returns to the service department. Dealers say the product has proved its effectiveness in customer retention and satisfaction. They claim their service retention numbers have been on the rise because the product provides a great opportunity to get customers back into the dealership for their vehicle’s routine maintenance.

Dan Pozzuto, service manager/director at Extreme Nissan-Hyundai-Kia, has seen positive changes in his business since implementing the LLPW program.

“The program that they offer through National Automotive Experts has had a huge impact in service,” he says. “This dealership’s seven-year service retention is No. 5 in the nation. Our one-year service retention is No. 1 in our region with respect to Nissan. With my Hyundai and Kia numbers, I am in the top 10 percent in the region in both of those.”

In addition to increasing service retention, Pozzuto says he believes offering the program makes it easier to upgrade customers to additional coverage. “It seems to me you’re getting a customer in the mindset of taking care of their car for a long period of time, and the additional coverage becomes important.”

Travis Freeman, service director at VanDevere Pontiac-Buick-Chevrolet-Kia, has also seen the benefits of such a program. “It’s a great sales tool for us,” he says. “Our units have increased, and it’s a great retention tool for the service department.”

There are, however, some points of confusion for customers. Freeman says that some customers express concern that if they don’t maintain their vehicle according to the LLPW warranty, it would also void the factory warranty. But as he further explains, “It’s just a matter of educating the customers.”

Pozzuto also works to educate customers about the benefits of their LLPW coverage combined with additional warranty coverage. If a customer’s vehicle needs repair and it covered by the extended warranty and the LLPW, the latter will pick up the deductible and the customer will not pay anything out of pocket.

Although LLPWs require that routine maintenance be completed, most dealers say this is not a problem. Customers seem to be following through with the routine maintenance requirements, as evidenced by the increased service retention at the dealerships interviewed for this article.

Pozzuto says, “This program really allows us to build long-term relationships with customers because you are truly able to help the customer, and I think that’s the biggest benefit of the program.”

The important take-away messages from this article follow:

1. The LLPW product is appealing to dealerships as a useful selling feature and as a way to increase service retention and customer visits to the dealership.
2. From an actuarial perspective, there is now a better understanding of how the LLPW product will earn out.