Estimating the Ultimate Liability for a Non-Insurance Company’s Revised Warranty Product

Motivation: Non-insurance companies are offering ever greater enhancements to their warranty programs, many times as a competitive tool to strengthen market position. Yet, oftentimes very little analysis is performed to understand the cost of these changes. This paper discusses how warranties are accrued for on a manufacturer’s balance sheet and offers examples of methods to estimate these costs.

Method: Most of the paper’s discussion centers around projecting actual payments over time using an approach similar to an incremental loss development triangle approach, properly adjusted for exposure and inflation changes. Other methods discussed include Bornhuetter-Ferguson, Average Age of Warranty Claim Times Annual Spend, Active Life, and Calendar Year Payments to Revenue Approaches.

Results: The most appropriate projection method may depend on factors such as available data or the nature of the company’s product.

Conclusions: Actuarial projections of warranty costs rooted in common actuarial reserving and pricing techniques are appropriate for estimating the future liabilities for the warranty liabilities.

Keywords: Warranty/Service Contracts; Parts and Labor Cost; Reserving; Pricing.