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Return on Warranties: $1.2 Billion
N.E.W. Customer Services Cos. is run by chief executive Tony Nader, left, and Chairman Fred Schaufeld. It has more than tripled in value in two years.
(By Rich Lipski -- The Washington Post)
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Schaufeld and Tony Nader, chief executive, said recent growth was fueled by the influx of talent, expanded product coverage and stolen business from the insurance companies that are the largest underwriters of such warranties.
Consumers pay about $15 billion a year in premiums on extended warranties, according to industry publication Warranty Week.
Critics argue that the risk of a product breaking is rarely worth insuring. For a $2,000 home theater system, even a one-time premium of $20 is, statistically speaking, a waste of money.
"I think people are behaving irrationally when they buy these things," said David Cutler, professor of applied economics at Harvard University. "For most people, at the level they spend on these products, it's not a risk you need to insure."
Schaufeld says he's not selling insurance but convenience and assurance that the product will be fixed or replaced quickly.
"We have spent 23 years making sure it's a good product and not a rip-off," he said. "The reason we do it is to save time. . . . There are consumers who are perfectly happy to fix this stuff or replace it on their own. It's not a product for them."
Retailers get a cut of the premium -- the industry norm is 50 percent -- and, if they're pleased with N.E.W.'s service, a loyal customer.
N.E.W. paid more than $400 million in claims to 4 million customers last year. The firm works with three major insurance companies who take on the financial risk, and most of the claims money goes to a network of 25,000 independent service technicians.
Of the firm's financial backers, the biggest winner is Novak Biddle, a small venture capital firm that typically backs small, start-up technology companies. The firm's investment of under $2 million has returned 87 times back to the fund's investors. Yesterday, partner Jack Biddle was sending out millions of dollars' worth of checks to the fund's investors, proceeds from the N.E.W. sale.
"It's pretty cool," Biddle said.
