Background and risk management issues

Multinational groups such as car or electrical equipment manufacturers increasingly invest in the quality of their products by reinforcing their production processes and their R&D activities. Consequently, they have confidence in their products, and are often willing to propose extended warranty options to their customers. Doing so they have a better control over product costs as they handle the whole lifecycle process from production to repair, and they increase customers’ protection and loyalty to their products.

In this example, we use a case of a multinational car manufacturer based in Europe, producing cars globally and has put the priority on high quality and security. With a total of 4 million cars produced annually and output increase expected, the group is a leader in the market and invests millions of dollars in innovation and services. The group relies on its strategy and is willing to offer its customers 3-year extended warranty contracts under which it covers motor damage, as well as mechanical or electrical defaults.

Alternatives considered and implemented solution

The group initially envisaged partnering with a commercial insurance company to place such risks in the market. But traditional insurers generally charge higher premiums for such products than it effectively costs a manufacturer to provide the services, thanks to cost of the insurer’s infrastructure (sales network, policy administration, dedicated claims management processes, numerous types of insurance products to handle, customers’ data management, etc.). It would also introduce a third party into the relationship between the car manufacturer and its customers, which is not aligned with the strategy pursued by the group.

Since such extended warranty services is an integral part of the commercial strategy of the group, it was critical to offer competitive pricing. The group therefore decided to self-insure the corresponding risk by setting up a captive insurance company to act as a primary insurer, and to issue extended warranty insurance contracts to its customers at the time they bought the car. This strategy also enables the group to have oversight of the exact coverage provided, its conditions, claims process and the covered countries.

All income generating activities are supported by the captive underwriting committee with decision making at the captive local level within the captive jurisdiction. The underwriting committee determines the scope of coverage, the pricing strategy and the in-scope countries, and it regularly reviews underwriting performance to adjust pricing or coverage as needed. All insurance and operational risks are directed and monitored by the risk management function of the captive who reports to the Board at least twice per year. The regulatory capital requirement is derived using the Solvency II Standard Model.

Outcome and key benefits

This programme created a new source of revenue for the group, helped increase customers’ protection and loyalty, and provided the group with full ownership of the lifecycle of the product.

Source: Federation of European Risk Management Associations (FERMA) Perspectives: CAPTIVES IN A POST-BEPS WORLD

Background and risk management issues

Multinational groups such as car or electrical equipment manufacturers increasingly invest in the quality of their products by reinforcing their production processes and their R&D activities. Consequently, they have confidence in their products, and are often willing to propose extended warranty options to their customers. Doing so they have a better control over product costs as they handle the whole lifecycle process from production to repair, and they increase customers’ protection and loyalty to their products.

In this example, we use a case of a multinational car manufacturer based in Europe, producing cars globally and has put the priority on high quality and security. With a total of 4 million cars produced annually and output increase expected, the group is a leader in the market and invests millions of dollars in innovation and services. The group relies on its strategy and is willing to offer its customers 3-year extended warranty contracts under which it covers motor damage, as well as mechanical or electrical defaults.

Alternatives considered and implemented solution

The group initially envisaged partnering with a commercial insurance company to place such risks in the market. But traditional insurers generally charge higher premiums for such products than it effectively costs a manufacturer to provide the services, thanks to cost of the insurer’s infrastructure (sales network, policy administration, dedicated claims management processes, numerous types of insurance products to handle, customers’ data management, etc.). It would also introduce a third party into the relationship between the car manufacturer and its customers, which is not aligned with the strategy pursued by the group.

Since such extended warranty services is an integral part of the commercial strategy of the group, it was critical to offer competitive pricing. The group therefore decided to self-insure the corresponding risk by setting up a captive insurance company to act as a primary insurer, and to issue extended warranty insurance contracts to its customers at the time they bought the car. This strategy also enables the group to have oversight of the exact coverage provided, its conditions, claims process and the covered countries.

All income generating activities are supported by the captive underwriting committee with decision making at the captive local level within the captive jurisdiction. The underwriting committee determines the scope of coverage, the pricing strategy and the in-scope countries, and it regularly reviews underwriting performance to adjust pricing or coverage as needed. All insurance and operational risks are directed and monitored by the risk management function of the captive who reports to the Board at least twice per year. The regulatory capital requirement is derived using the Solvency II Standard Model.

Source: Federation of European Risk Management Associations (FERMA) Perspectives: CAPTIVES IN A POST-BEPS WORLD