When I was asked by F&I magazine to prepare an article providing a retrospective of the industry and how it has changed in the last 30 years, I began to think about where to begin. It was then that lightening struck: “How about the beginning?”
You can say the industry began with the 5/50 (i.e., 5-year/50,000-mile) powertrain warranty, as vehicle service contracts (VSC) had been around in one form or another since the late 1950s. By the early 1970s, however, domestic manufacturers dropped their factory warranty 5/50, leaving customers — who had been bombarded with the importance of the 5/50 — without coverage. That led a few smart people to ask, “Why not provide them with one and make money doing it?” This gave birth to the 5/50 and 3/50 new-car extended warranty plans.
The problem with these early attempts was that none of the plans were insured, and most were limited to specific regions. At the time, the oil companies were the only ones providing customers with warranties — the one I remember being Pennzoil. Free to dealers using the product, the warranty promised the oil would not fail. It was given away regularly on used vehicles, and only a few claims were paid.
The VSC business grew quickly and a few of the regional companies reached national stature. Some of the names you might remember are the N.J.-based National Auto Dealer Services (NADS), California-based American Warranty Corp., the Oklahoma-based ADESCO and many more. By the mid-1970s, things began to change. Claims began coming in, and some of the original companies found themselves unable to pay — causing many to go out of business. This resulted in the larger national companies replacing the smaller regional companies. Some states also began requiring that dealerships obtain insurance to back the warranties they were offering. On top of that, two congressmen decided the industry needed a warranty law that defined what a warranty represented. This resulted in the Magnuson-Moss Act, a law that stands today and one that, among other things, defined a warranty as a vehicle service contract.
As longstanding as that law is today, I don’t know of any two lawyers who can agree on all of its meanings and implications. One of the original authors of the law described it as broad, which I think says it all. More importantly, it was the Magnuson-Moss Act that raised the eyebrows of government regulators. Scrutiny of the industry began to increase, as did regulations governing how dealerships conducted business. This pushed out more of the original VSC companies, allowing the larger companies to continue growing and new ones, such as Pat Ryan and J&M Family Enterprises, to enter the market.
The Shifty 1970s
With new and more financially stable companies popping up, dealers had an assortment of new- and used-car VSCs to offer their customers. Once again, business began to grow rapidly. But the scrutiny persisted, and by the late 1970s, a major Buick dealer in California was forced out of business after being charged with a number of misdeeds, including the sale of thousands of service contracts with no insurance backing. The court singled out the bank for financing the contracts, forcing it to pay millions in claims. This resulted in a dramatic shift in the vehicle service contract business.
Not only were some states requiring dealers to obtain insurance for the VSCs they sold, but lenders were as well. Once again, a number of smaller companies were forced out of the business, which set the stage for the wild 1980s.
The Decade of the Manufacturers
With gross profit shrinking, VSCs quickly became a staple at automotive dealerships, spurring tremendous growth throughout the 1980s. Still, more of the original companies, such as NADS, fell by the wayside, with only a few upstarts surfacing, such as MIA. They grew quickly but also failed just as quickly. This was the decade of the manufacturers, which decided to jump into the VSC market in a big way.
One of the earliest companies to come out of this period was General Warranty, led by warranty veteran Jerry Farrar. Credited with many industry innovations, Farrars company quickly grew to more than 50,000 contracts a month at its outset. Pat Ryan, which became Resource Group — owned by AON and Jim Moran of Southeast Toyota — also began its meteoric rise during the decade.
The period gave birth to many new programs, some of which — including the five-year unlimited program — fell by the wayside. However, many more became a mainstay in the industry, such as the zero deductible, 7/100s, retro’s and dealer reinsurance. Manufacturers also wanted a piece of the action, and the “warranty war” ensued once again.
Chrysler was the first to jump, offering a 7/70 powertrain, followed by Ford and GM’s 5/60 program. Many of the programs would ultimately decrease during the decade to 36/36, but the repercussions from the battle were felt. The uncertainty surrounding the underwriting business was one of the casualties, and underwriters suffered huge loses. Still, the industry experienced tremendous growth, which brought in companies such as GE and Western National Warranty. But this uncontrolled growth would also lead the industry into the turbulent 1990s.
The Turbulent 1990s
It would be during the 1990s and early into the next decade that the the battle lines were set. Financial strength was the motto. Dealers who feared the financial security of warranty providers went back to vehicle manufacturers. The dealers who didn’t, called on companies such as as GE, CNA (purchased by Western National), AON and J&M. Soon, the need to increase F&I profits forced many dealers to go back to independent VSC providers, which, historically, provided higher margins. Vehicle manufacturers still controlled the lion’s share of the industry, but the independents found new life.
The industry once again began to grow rapidly, but with one big difference: Technology was now king. Warrantech was the first to introduce a full online operating system for its VSC programs. Soon, others would follow.
Today, the use of technology has become commonplace, with more and more innovations being introduced. This new element (i.e., cost), however, forced many independents to seek out additional financial resources.
Those that didn’t became victims. In 2006, many longtime companies were either sold or are in the process of being sold.
Interstate, now owned by a large investment group, was the first. AON followed shortly thereafter, with Warrantech expected to be purchased by HIG Investments in the near future.
The business has undergone dramatic changes since its founding almost 30 years ago, going from a business loaded with smaller regional companies to a multi-billon dollar industry made up of large, well-financed companies. For one, today’s industry is much more stable, better administered and more responsive than ever. However, I do miss those pioneers who started this business from scratch. They just had a certain panache.