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:
- 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.
- 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.
- 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.
- 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.
What is a Service Contract Obligor
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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