As an finance entrepreneur, I am quite familiar with the extended warranty business model having evaluated it for my own business purposes. The business model is underwritten and managed pretty much the same way for home appliances, electronic gizmos, or cars. It is a very profitable business for the insurer and dealers that sell it.
The comments are spot on...extended warranty risk is underwritten on a policy-by-policy basis but the underwriting is based on averaged risk, managed accordingly, and a very tidy profit is made by the insurer.
The product sells because buyers really do believe they will beat the odds and receive more benefit in return than the policy costs them
. Sometimes they do (I did), but on average they do not. Everyone wants to believe they will be a special case or maybe even smarter than the next guy. The product also sells because sometimes buyers believe that the insurer is well intentioned and is watching out for their customers...
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A manufacturer issued extended warranty is most likely going to be around for the long haul versus a third party.
Check the state-by-state insuance requirements yourself...there ain't a whole lot of financial backing to extended warranty companies
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Major financial companies are dropping like flies and will continue to do so, and there is no guarantee your extended auto warranty vendor will be around (unless from the manufacturer). Just because extended warranty policies are profitable does not mean the extended warranty company will be well managed and be around long-term.
I had an extended factory warranty on my Audi Allroad. Its pneumatic suspension can be finicky, problematic, and expensive to maintain and repair. The warranty was part of the purchase deal from an Audi dealer.
For my Allroad, it paid off. I was lucky...not because the warranty provider was dumb, generous, or watching my back...I was just plain lucky and beat the odds.
