Making markets: extended product warranties

The past decade has seen a discernible shift of manufacturers’ income from product sales to sales of services, whereby companies have moved more and more into software and services innovation. Learning what IBM learnt back in the 1990s, they recognise that there is more margin to be made here.

By providing extended product warranties, insurers follow this trend by helping its customers in these industries to generate growth and to facilitate R&D and development in new markets, from machinery, renewable energy to transportation and navigation systems, explains Urs-Oliver Neukomm, senior structurer in the Innovative Risk Solutions team of Swiss Re Corporate Solutions.

“This is a big initiative at Swiss Re Corporate Solutions,” he explains. “We are trying to help our customers grow despite a difficult economic environment and this is one of the areas where we can clearly help them.”

The shift from manufacturing to services is becoming increasingly prevalent in transportation, where the future promises mobility-as-a-service (MaaS): One in which engine manufacturers will increasingly collaborate with software and communications providers to offer the passenger (or consumer) a more comprehensive customer experience, in the power and utilities industries and its affiliated industries, where sensor based, remote and “real time” controlling and monitoring of power engines, valves, pipes, etc. facilitates condition based maintenance instead of “static cycles”. This list can go on and on.

“In the future you will not sell a car, you will sell a transport capability,” says Philippe Cotelle, FERMA board member and head of insurance risk management, Airbus Defence & Space. “That’s probably the biggest shift ever for the manufacturers in terms of liability exposure.”

“I was recently at a motor exhibition in Paris and usually you have the big manufacturers at the front and the suppliers are at the back and in fact at this exhibition the suppliers were at the front,” he continues. “And that’s because the ‘brain’ of the car is becoming more important than its frame.”

As the automotive sector develops, extended product warranties are becoming an important differentiator. In much the same way that warranties have been used to compete in the domestic electrical goods sector, buyers of electric vehicles (EV) are receiving extended cover from manufacturers for expensive and highly-specialist components such as EV batteries.

Moving beyond motor, there are opportunities to provide extended warranties in other burgeoning industries. A particularly challenging sector is renewable energy, one of the few industries where 25-year warranties on solar PV is the norm. The challenge of providing extended warranties for an emerging technology is gathering the data and knowhow in order to assess the risk and its exposures where decades of claims information is not available.

“We need industry know-how - we need people from that particular industry where we would like to provide such coverages,” explains Neukomm. “We need to have a clear understanding of the industry, not only from an underwriting perspective but also from an engineering perspective and so we need people who really know how the business model of a particular industry works and what the technology challenges are in that particular industry.”

“We also need a willingness to go beyond the traditional underwriting methodologies,” he continues. “Where perhaps we don’t have 20 or 30 years of loss data but the technology has been around for 10 to 15 years, and has therefore been tested to a certain extent. Enough to give us confidence that we can guarantee its performance. And beyond that we probably also need more advanced data mining and analytics methodologies than traditional stochastic and statistical analysis methods in order to assess and quantify such future risk exposures properly, i.e. beyond speculation. Clearly, all challenges, but also opportunities.”

“We wouldn’t do it for everything, but certain technologies are so established that even without having the actual loss data available it allows us to be confident enough to provide extended warranties.”