Self-funded warranties could pose financial risk to dealers - report

12:37 pm, June 10, 2024

New research conducted by Warranty Solutions Group (WSG) has found that dealers using self-funded warranty admin schemes, also known as Dealer Fund schemes, could be at risk of annual claims exceeding their fund allowance.

The report, which analysed 55 of the admin schemes WSG administers on behalf of dealers, found that almost a quarter (22%) had insufficient funds to pay for claims over a 12 month period based on their average claim rates and average claim amounts.

Further analysis revealed that within the next year, the same dealers will need to top up their claims fund pot – in some cases by as much as £20,000 – in order to meet their obligations of providing a pay-out to customers.

According to John Colinswood, WSG’s CEO, the analysis spanned a broad cross-section of dealers, ranging from ‘small independents to multi-site franchises’, with the results revealing that the average claim under Dealer Fund schemes was £559.78 – £87 higher than WSG’s national average of £472.12 under its dealer warranty programmes.

Revealed: The most common car parts to fail on used cars – and the most reliable cars

Colinswood commented: ‘While on the surface self-funded schemes promise to save dealers considerable spend on their warranty costs, our research highlights that the reality can be quite different.

‘A stream of claims – or even one big claim – can quickly evaporate any chassis profit the dealer has made. It’s a huge financial risk which they have virtually no control over and one that can seriously impact cashflow,’ he added.

WSG also highlighted the fact that a quarter (24.32%) of all claims analysed during the study were made within the first 30 days, with almost 10% (9.31%) within the first 10 days alone. A point that is likely ‘due to insufficient standards of pre-sale vehicle preparation,’ according to the company.

Colinswood said: ‘Using a reputable warranty provider instead of an admin scheme transfers the risk, significantly reducing the chance of potential large warranty claims consuming profit and impacting cashflow’.

What’s more, WSG claims that if retailers are able to ‘upsell’ to longer terms, they would either reduce their warranty costs, or – depending on how successful their upselling strategy is – eliminate them entirely.