Magazine article Risk Management

Protecting the Balance Sheet from Warranty Liabilities

Magazine article Risk Management

Protecting the Balance Sheet from Warranty Liabilities

Article excerpt

It seems simple enough -- to increase market share, manufacturers offer customers a warranty promising free product service, replacement or repair. That promise, however, can backfire on the balance sheet or income statement, creating legal liabilities and costs exceeding those posted on the books.

Meanwhile, the management of a product warranty can be as challenging as the manufacturing process itself, requiring staffed call centers using sophisticated technology, warehoused inventory of component and finished goods, repair and related labor obligations, and customer fulfillment and distribution costs. Boil it all down and a warranty is anything but simple.

Enter Zurich North America, an insurance group with sophisticated solutions to the most daunting warranty and balance sheet predicaments. A part of Zurich Financial Services Group, Zurich North America brings to the table both the solid-state financial reliability of a top-rated insurer and superior warranty program administration through GE-Zurich Warranty Management (GEZWM), its joint venture with GE Warranty Management.

Our warranty insurance solutions will help you minimize earnings volatility by reducing the financial uncertainty that results from retaining an open liability on the balance sheet. We can help your company recognize revenues and enhance profitability. And our one-stop shop will administer complementary warranty service programs. It's our all-in-one value proposition.

Basically, a warranty is a contract that is "issued" by the OEM, thereby creating a financial liability that must be carried forward on its balance sheet. Although many multiyear warranties are provided free of charge to consumers, they pose potential back-end costs for the "obligor," the legally obliged party to respond to the warranty contract.

Estimating the potential cost of this liability is difficult, given the unknown nature of product use and life. The more warranties issued for different products, the more these liabilities accrue on the balance sheet. Competition among OEMs also can raise the stakes by compelling companies to provide longer duration warranties to differentiate their products.

But there are more than financial issues at play, as companies must also manage the terms of the warranties they issue. Reliable customer service and support is at the heart of this (e.g., obligors must promptly fulfill product replacement and repair requests). Obviously, this is not a core competency at most OEMs, which are focused on product design, manufacturing and quality.

Zurich North America solves these dilemmas. As a leading provider of insurance, financial and risk management solutions, we can customize programs enabling manufacturers that accrue warranty liabilities to strengthen their balance sheets by letting us absorb the risk. Given that warranties are, in effect, insurance contracts, OEMs would be wise to consider an expert in risk analysis and risk transfer to take this liability off their books.

Zurich North America will "monetize" your OEM-based warranties, making them our legal obligation and not yours. Our warranty specialists can structure risk transfer solutions to cap or control liabilities resulting from virtually any product or component-based warranties, while optimizing accounting, regulatory, insurance and financial consequences. These tailor-made strategies range from fully insured programs to captive insurance. …

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