Reconfigured VSCs
 
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by David N. Robertson
AFIP Executive Director
 

In times of stingy lenders and cash-strapped customers, VSC penetration generally suffers.  Fortunately, the product owes its resilience to its remarkable ability to reconfigure itself to fit changing market conditions.  Hard times dictate limited advances with an emphasis on low monthly payments.  Hard times also mean that most customers would be hard pressed to cover the expense of a major mechanical failure, especially when a growing number will be keeping their cars after the factory warranty expires.  And of course, surviving in F&I means generating a modicum of department income from as many customers as possible – having something people will buy is crucial.

As a thirty-year VSC veteran, a former TPA founder and owner, and a longtime and currently active industry consultant, the following is offered for consideration.  I am suggesting that a new- and used-vehicle coverage line be developed as a catastrophic loss option.  The minimum deductible for used vehicles might be in the $300 range with a $600 base for new vehicles.  The deductible should be based on each covered component with coverage limited to primary mechanical and electrical systems.

The unusually high deductibles, when factored into their impact on both claim frequency and loss cost, should result in reasonable levels of coverage at very favorable net-remit levels.  The customer is protected against a catastrophic mechanical failure at an affordable initial purchase price – one that the most lenders will find acceptable – and the F&I person has a sufficient margin to make a few shekels on the deal. 

Some regulatory eyebrows might be raised because the deductibles approach or exceed the amount paid for an average claim, but if they are limited to a special class of coverage – catastrophic loss – they might be allowed to fly.  As VSC administrators reshuffle their decks in search of the right product for the times, it might be worth running the numbers on a very high deductible limited-coverage catastrophic loss option.