FOOL'S EYE VIEW
By
A couple of weeks ago, I was packed off to my nearest electrical retailer to buy a new vacuum cleaner, having been told by my recently-acquired daily (or, rather, twice-weekly), that my current one was "crap". Having consulted the May issue of Which?, I discovered that one of their recommended Best Buys was also the cheapest, so I opted for a very shiny, very silver upright called a Slimax, for the princely sum of £59.95. The conversation with the cashier went something like this: Him: If you'd like to fill in this form, you'll get a three-year guarantee on it for just £17.50. Me: No, thanks. Him: Why's that then? Me: Because I generally don't think extended warranties are worth the money -- and especially not for something that costs less than £60. Him: But it could go wrong, you know, and we guarantee to give you a brand new replacement if it does. Me: If it goes wrong sooner than it should, I'll be in here claiming a replacement anyway, either under the manufacturer's guarantee or under the Sale of Goods Act! I did smile at him (honest!), especially when I asked how much commission he got whenever he sold one of these policies. Apparently, it's "only 50p" but, of course, if he sells just five of them a day then he's looking at around £50 a month extra in his pay packet, isn't he? It was just the way he assumed I would take out the policy and then got a tad indignant when I politely declined that annoyed me. I mean, why on earth would I want to pay nearly 30% extra when I have other remedies available to me? Fortunately, the Office of Fair Trading (OFT) has just spent the last nine months investigating extended warranties and their report published earlier this week indicates they're not terribly impressed with them. They found that extended warranties can add as much as 50 per cent to the cost of an electrical item and that consumers were not usually adequately informed about the extent of the cover, nor were they always getting value for money. And since most extended warranties are sold by the large multiple electrical retailers, there appeared to be a bit of a monopoly in the market. They also realised that a code of practice that was put in place as a result of their last investigation in 1994 has largely been ignored. And they made it clear that they found it difficult to discover just how much the market was worth because a number of 'key' firms were less than co-operative when it came to answering certain questions. They've estimated that it must be worth more than £500 million a year though, and that's a big enough number for them to refer the matter to the Competition Commission who have considerable powers to extract the necessary information about whether consumers get value for money. As we've said many times before, the best way to cater for a breakdown or replacement of new appliances is to "self-insure". Simply pay all that warranty money into a high-interest savings account so you've got the money available to pay for repairs or a replacement yourself whenever it becomes necessary. After all, it's unlikely that your washing machine, dishwasher, cooker, TV, video and DVD player are all going to break down on you at the same time -- if at all inside the warranty period. And think about this: if you pay £195 to insure your brand new £400 washing machine for repair and/or replacement over five years, what exactly are you paying for? You're covered by the manufacturer's guarantee for at least the first year anyway, so there's no point in paying for that. And if you think that paying £50 a year for the remaining four years is still value for money, then take note of the OFT's finding that the average repair cost is about £50. So unless your machine breaks down at least once a year during the last four years of the warranty, you're wasting your money. Besides, if you're really taken with that 'peace of mind' sales tag, then at the very least you should shop around among insurers or even the manufacturer to make sure you get the best deal. And that leads me nicely on to the funniest bit of the OFT's report: Based on the low claims ratio for extended warranty products, we have reason to believe extended warranties may be typically sold at considerable profit.
Nice to know the OFT has a sense of humour! More: Insurance Centre
