Word Wednesday! CATEGORY: Warranty Jargon, WORD: Severity

by Scott Walker on June 6, 2016
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This week's category: WARRANTY JARGON

This week's word: SEVERITY

Last week we talked about FREQUENCY in the W3 blog so today we must introduce its partner in the Pure Cost of Claims formula - Severity.  In the warranty world, severity is considered the average cost of claim for each product that you offer a warranty on. Simply put- the cost of repair or replacement.

Key Cost Drivers of Severity are:

  • Parts and Labour Cost Per Repair
  • Product Replacement - if it cannot be repaired
  • Taxes, levies, and fees - knowing which ones you are responsible to pay
  • Shipping costs to and from the Service Centre
  • Travel Costs if the product must be repaired in the home (i.e. Appliances)
  • Good Will payments that are paid to maintain customer satisfaction

It is important know what the severity rate is so you can budget for the potential claims made. Once you know the Frequency and Severity, you will be able to calculate your future claim costs. At that point you can determine how much money you need to sock away (Insurance Reserves) to pay these claims.

Simply put, if you don't put aside enough money to cover the claims for the warranties you have sold, the next call you get will be from your bankruptcy attorney.

Oh, and don't forget to set money aside for your call center, someone has to answer the phone. You will also need some funds for adjudicators to administer the claims, finance to pay the invoices and reconcile your reserves, and don't forget the commissions for your salespeople to sell the program. You get the picture.   It's complicated.  But if a warranty program is set up and managed correctly it can double your profits, increase repeat business and build your brand.

Stay tuned and we will walk you through the best practices for setting up, implementing, and growing your warranty business. 5 steps to setting up a warranty program cta

Topics: Retail, Severity, Extended warranty, Warranty, Claims