Similar programs have been offered to dealers over the past decade, says Gary Fagg, a Hurst, Texas, consulting actuary.
Dealers can avoid doing business with shaky vendors, he says, by asking some tough questions:
Who is backing the program? Fagg says it should be an A-rated insurer.
When does the backup insurance for the program kick in, and what are the coverage limits? The vendor should be setting aside money for refunds. But if the funds run out, the insurer should pick up the cost. Check the coverage limits. The coverage may only apply after the vendor has exhausted 100 percent of its reserves or paid out a specified amount in claims. What if the vendor runs off with the money before reaching the coverage limit? The coverage never takes effect, Fagg points out.
Does the vendor have a substantial reserve fund? Or is it just what he has in his checking account?
Ask yourself: Do I really want to do this to my customer? For the economics of money-back guarantees to work, they need a slew of restrictions. For example, to qualify for a refund, the customer must still be driving the original vehicle, must wait until the contract expires, must have no claims, and must request the refund 30 to 60 days within the contract expiration date. Some guarantee programs count using a roadside assistance program as a claim.
"Service plans can be seven years," Fagg says. "Someone's going to have to put that expiration date on their calendar."