What is a Profit Share




What is a Profit Share


A profit share is an arrangement with the insurance carrier or service contract obligor (provider) that allows the manufacturer or retailer to participate in any remaining funds in the claims reserve account after the contracts have been partially or fully earned.

A typical structure is to determine how much is needed to fund future claims and then add a small buffer. This is the claim reserve. Then you add the claim reserve and the fee (including taxes) a carrier takes and add that to the claim reserve to yield the gross amount the carrier receives.

If the future claim per item was determined to be $100 and you added a 10% buffer ($100/.90), the total is $111. If the carrier adds a 10% fee ($111/.90), you have a $12 fee plus the $111 claim reserve for $123. If the claims come in as expected, you will have approximately $11 per contract remaining in the reserve. This remaining amount is then subject to negotiating a profit share.

Profit shares exist when a program can support it based on the size of the program, the carrier fee, and underwriting performance.

For additional information on Service Contract, Limited Warranty, and Specialty Insurance Programs visit Meramec Secure.

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Developing and Pricing a Product Warranty Insurance Program




Developing and Pricing a Product Warranty Insurance Program





Developing and Pricing a Product Warranty Insurance Program


Additional information on manufacturer warranty insurance is available at Meramec Secure.

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Building a Manufacturer's In-House Service Contract Program




Building a Manufacturer's In-House Service Contract Program





Building a Manufacturer's In-House Service Contract Program


Additional information on manufacturer warranty insurance is available at Meramec Secure.

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Implementing an Appliance Warranty Insurance Program




Implementing an Appliance Warranty Insurance Program





Implementing an Appliance Warranty Insurance Program


Additional information on Implementing an Appliance Warranty Insurance Program is available at Meramec Secure.

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Auto Deductible Reimbursement Insurance




Auto Deductible Reimbursement Insurance





Auto Deductible Reimbursement Insurance


Additional information on Auto Deductible Reimbursement Insurance is available at Meramec Secure.

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Home Deductible Reimbursement Insurance



Home Deductible Reimbursement Insurance





Home Deductible Reimbursement Insurance


Additional information on Home Deductible Reimbursement Insurance is available at Meramec Secure.

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Service Contract Reimbursement Insurance Video




Service Contract Reimbursement Insurance Video





Service Contract Reimbursement Insurance Policy (SCRIP)


Additional information on manufacturer warranty insurance is available at Meramec Secure.

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What is Default Warranty Insurance



What happens to the warranty if the manufacturer goes out of business?


Many manufacturers offer long limited warranties, with 10-years for LED or 25-years for solar panel warranties being common.

These long warranties are very attractive and help justify a long-term return on investment for the end purchaser. Often, these programs are leased or financed, so the systems must perform properly for the length of the warranty.

The problem is customers want to know what happens if the manufacturer goes out of business and no one can stand behind the warranty.

Options exist for a low one-time cost to obtain default insurance to back the warranty if the manufacturer goes out of business. This is not a service contract, it is an actual insurance policy to "backstop" the manufacturer's warranty if the manufacturer goes out of business.

The process doesn't change for the manufacturer, who continues to manage their warranty, customer experience, and claims management. There is no need to pay a third party to insert themselves between the manufacturer and the end customer.

Additional information on manufacturer warranty insurance is available at Meramec Secure.

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Service Contract & Specialty Insurance Resources



New Service Contract & Specialty Insurance Resource



Meramec Secure, Inc.
Fully licensed P&C insurance agency, claims administration, specialty insurance programs, service contract reimbursement insurance and contractual liability insurance solutions. Affinity and membership solutions, retail insurance solutions, product warranty insurance solutions, and service contract financial guarantee solutions. Example solutions include:

  • Auto & Homeowner Insurance Cross Sell Solution
  • Auto & Home Deductible Reimbursement
  • Emergency Lodging
  • Homeowner Glass Breakage
  • Lockout Service
  • Product Warranty Insurance
  • Service Contract Reimbursement Insurance
  • Shipping Insurance
  • Solar Warranty Insurance

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Top Considerations when Forming a Service Contract Provider



Here are the Top Items to consider when you are evaluating building or in-sourcing a Service Contract Program:


Overall Structure
    Previous articles discuss the various elements of a service contract program, including the obligor (provider), the administrator, the financial guarantee, and the service entity. Options exist for structuring a program with some internal components and some outsourced ones. For instance, using a third party as the obligor (the company making the legal promise to a consumer) has many potential benefits, such as rev recognition and no need to file for a license in many states. Time to market is faster with this option and significantly less expensive in many cases.

Insurance Partner
    The most common method to satisfy state-level financial guarantee requirements for a service contract program is to use a Service Contract Reimbursement Insurance Policy from a licensed and admitted insurance carrier. Multiple good options exist for an insurance carrier; knowing which carriers are better at what programs and structures is extremely important.

Technology Partner
    Many options exist for managing a service contract program, and each provider has unique capabilities and expertise. Knowing the options that make sense is important, and performing a deep dive into the partners to find the right solution is important. Options range from in-house limited functionality solutions to large Enterprise solutions.

Legal and Compliance Partner
    It is important to understand each state's legal and compliance landscape for service contract programs. This includes support in creating the actual terms and conditions, understanding administrator licenses, understanding obligor licenses, understanding seller appointments, and many additional elements. Even if you use a third party for some elements, you should have visibility into the requirements and any changes.

Rate Development
    This includes understanding how to price your program and the various inputs necessary to build a model. Actuarial support may be necessary depending on the program, so knowing the right option is important.

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Who is the Best Company to take Care of Your Auto Customers



Who is the Best Company to take care of your Auto Customers?


If you are a used car dealer frustrated with third-party providers and their claim practices, you may have options to take control of your program with limited complexity.

Many dealers set up their own provider (obligor) or use a third-party obligor, obtain a contractual liability insurance policy (CLIP) from an A-Rated carrier for compliance or lender requirements and manage an in-house program.

It's easier than ever to take control of your service contract program. Great options exist for Independent Used Car Dealers & BHPH Dealers. Ensure your service contract program is aligned with your business objectives around customer care.


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How do Carriers Build Service Contract Prices and Rates




To create a rate for a wholesale cost of a service contract or limited warranty, you need to determine four (4) values:
  • Frequency. The Frequency is the percent of the covered items that are expected to have a claim.
  • Severity. The Severity refers to the cost to repair or replace the covered product.
  • Target Loss Ratio (TLR). The Target Loss Ratio (TLR) refers to the expected utilization of the funds set aside for future claim payments.
  • Provider's Fee. This is calculated as a percent of the required claim reserve and should include premium tax.

By entering selected pieces of information, you can develop a rate using a model similar to how carriers and providers develop rates.



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Retailers and Manufacturers - Take Control of Your Customer Experience



Now more than ever, Retailers and Manufacturers need to focus on recovering lost margins and enhancing the customer experience by eliminating unnecessary layers and costs related to their Service Contract programs.

With many Retailers and Manufacturers already managing the customer experience with a replacement or repair program, there is no need to insert a third party for administration or for integration with the insurance carrier.   A direct relationship is the most cost-efficient method, yet most companies don't realize that this option exists, and unnecessary layers can add as much as 40% to the cost of a program versus a direct model.  

It’s never been easier to take control of a service contract program, maximize the value to the customer, and only use third parties for regulatory and insurance solutions.   

A properly structured program does not impact revenue recognition, does not require the Retailer or Manufacturer to obtain a provider's license, and still allows the Retailer or Manufacturer to participate in the underwriting profit when the contracts earn.

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New York Service Contract Provider Registration Instructions



New York Service Contract Provider Registration Instructions



Great information from the Department of Financial Services related to Service Contract provider registration..

This page includes details related to the Service Contract Provider Registration Application Form, Default Contingency Plan Agreement and Evidence of a service contract reimbursement insurance policy.

Visit the New York Department of Financial Services for complete details.

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Texas Department of Licensing & Regulations Service Contract Providers FAQ



Texas Department of Licensing & Regulations Service Contract Providers FAQ


Great information from the Texas Department of Licensing & Regulations related to Service Contract providers.

This page includes the licensing process, provider search, difference between a Service Contract Provider, Service Contract Administrator, and Service Contract Seller. Plus the Financial Guarantee requirements for a provider and administrator:

A provider must submit proof of one of the following three forms of financial security:

• A Reimbursement Insurance policy with Texas endorsement;
• A funded reserve account, security deposit, and audited financial statements; OR
• Proof of net worth of at least $100 million.

Administrators are not subject to the financial security requirements.


Visit the Texas Department of Licensing & Regulations Service Contract Providers FAQ page for complete details.

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Example State Regulatory Statutes for Service Contracts



Example State Regulatory Statutes for Service Contracts


To form a compliant service contract administrator or provider involves a patchwork of state regulations. Many states have specific statutes that address registration, licensing, requirements for the customer terms and conditions, financial guarantees, and other items.

Some states have separate and distinct statutes by product type. For example, Florida has unique statutes broken into Auto, Consumer Goods, and Home Warranties.
- Florida Warranty Associations (634)

Here is a link to one state, Illinois, that generally follows the Service Contract Model Act that has been adopted by many states. Each state is different; this is just an example.
- Illinois Service Contract Model Act (215 ILCS 152/)

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What is Product Warranty Insurance



What is Product Warranty Insurance?


When a seller or manufacturer (OEM) wishes to offer a longer product warranty but does not wish to retain all or some of the liability, they seek options for Product Warranty Insurance. For a single defined cost, the company purchases coverage to transfer the risk to a third party obtaining balance sheet relief.

This is an easy solution to offer a longer limited warranty on a promotional basis or for selected products. The transaction is between the company and the third party, and the end customer has no impact. In most cases, the company still takes care of the customer experience and manages the claim process just like under the "normal" warranty term. The company doesn't need to pay an administration fee or processing fees or go through multiple layers. This streamlines the costs for the company.

Depending on the product type, coverage exists for parts, labor, or parts & labor. The term includes a limited OEM or seller warranty retention, and then the liability falls to the third party. The obligations for the warranty or service contract are insured by a contractual liability insurance policy or other structure.


Product Warranty Insurance Overview


Additional information on manufacturer warranty insurance is available at Meramec Secure.


What is a Limited Warranty



A Limited Warranty is a warranty that is provided to a consumer under the Magnuson-Moss Warranty Act.

The Magnuson-Moss Warranty Act is a federal law governing consumer product warranties offered by manufacturers (OEMs) and sellers. The Magnuson-Moss Warranty Act does not require a manufacturer or seller to provide a warranty; however, it defines the requirements if a manufacturer or seller does offer a Limited Warranty.

Under the Magnuson-Moss Warranty Act, manufacturers and sellers of consumer products must provide the consumer with clear and detailed information regarding the Limited Warranty coverage if one is offered. This information directly impacts the rights of the consumer and the obligations of warrantors under the written warranty.

A Limited Warranty is provided at no cost to a consumer by the manufacturer or seller and provided to all consumers purchasing the product in the same manner.

It is important to properly design the Limited Warranty document you provide to the consumer to ensure compliance. Many great resources are available to assist you with designing the Limited Warranty document.

In addition to offering a Limited Warranty, manufacturers and sellers also have the option to offer a Limited Warranty and only retain a portion of the Limited Warranty under their balance sheet. A manufacturer or seller may decide to transfer a portion of the limited warranty risk directly to a third party. In this case, it is an insurance transaction and may be done directly with a carrier operating in this space and may provide balance sheet relief. The following structural options exist for Limited Warranty programs:

  • A manufacturer or seller may retain the warranty risk internally
  • A manufacturer or seller may outsource some or all warranty risk to an insurance carrier for a fixed price
  • A manufacturer or seller may perform consumer-facing warranty claims management internally
  • A manufacturer or seller may utilize a third-party administrator for some or all warranty claims management

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  • What is a Service Contract Administrator License



    Several states require a license or some form of registration to act as an administrator for service contracts. This applies if an entity other than the Service Contract Obligor (Provider) is administering claims. This varies by product type (auto versus consumer goods, for example).

    For service contracts related to consumer goods, this process ranges from having the obligor submit an acknowledgment form that the administrator understands its obligations under the law ( New York Example ) to a full license ( California Example ).

    The process may include a fee to the state, a copy of the terms and conditions from the obligor, a copy of the Service Contract Reimbursement Insurance Policy that backs the service contracts, a list of providers supported, registered agent information, and a completed application. The application includes company information and often includes shareholder information.

    The overall process is easy to navigate with the right help. Many great firms exist to assist with the process, and often the obligor will help as well.

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    What is a Service Contract Obligor



    As you research Service Contract programs, you will hear the term Obligor (aka Provider) as a significant component of the Service Contract process. At the most simplistic level, the Obligor is the legal entity that is issuing the Service Contract and making the promise.

    Many states have specific requirements for Obligors, including registration, terms and conditions design & filing, and demonstrating how the Obligor will provide a financial guarantee to back the Service Contract. Each state has its own requirements and varies on a product level, including vehicle service contracts, ancillary auto products, home warranties, and consumer appliances & electronics. Having proper compliance support is very important, and several great options exist to help you with compliance if you choose to form an Obligor.

    Forming your own Obligor is not necessary if you wish to design an in-house program. Many structural options exist to take control of the consumer-facing elements while using a third party for the regulatory side and not impacting revenue recognition. This streamlines a program, removes unnecessary costs, and allows the Retailer or OEM to control the customer experience for enhanced lifetime value. It is important to pick the right third-party partner for your business based on mapping out your objectives and the third party's expertise.

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    What are the Basic Elements of a Service Contract Program



    The Seller
      This represents the entity making the solicitation and sale of a Service Contract. This includes Retailers, Dealers, and Marketers.

    The Obligor (aka Provider)
      The Obligor (or Provider) is the legal entity that is issuing the Service Contract.

      Many states require some form of registration (licensing), form filing for terms and conditions, financial guarantees, officer and/or director biographical reviews, and other requirements. This is not a one-time event; ongoing reporting and license renewals exist in many states.

      This is on a state-by-state basis and varies on a product level. Examples include vehicle service contracts, ancillary auto products, home warranties, consumer appliances, and electronics products.

    The Administrator
      The Administrator is the entity providing customer entitlement, claim adjudication, and payment of claims.

      Some states require registration of the administrator and some form of financial guarantee.

    The Financial Guarantee
      Most states have requirements for how an Obligor (Provider) must provide for the financial guarantee of a Service Contract.

      Financial guarantees are intended to protect the Contract Holder from the financial failure of the Obligor (Provider).

      Financial guarantees may include cash reserves, bonds, a parental guarantee from an entity with substantial and defined net worth, or a service contract reimbursement insurance policy (contractual liability insurance policy).

    The Service Entity
      The Service Entity is a company the Administrator utilizes to perform repair or replacement services in fulfilling the obligations of the Obligor in the Service Contract.

      Some states require registration of the administrator and some form of financial guarantee.

    The Contract Holder
      The actual Contract Holder (or Consumer) that the Service Contract is issued to and who is the owner of the covered product.





    Process Flow for Service Contract Elements





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