Md. Casualty leaving field of auto warranties

September 12, 1990|By Maria Mallory

After taking the plunge into automotive warranty underwriting four years ago, Baltimore insurance giant Maryland Casualty Co. is exiting that business, leaving behind a wake of red ink.

As of Oct. 15, Maryland Casualty will cease underwriting extended service warranties sold to car buyers, said George F. Cass, Maryland Casualty executive vice president in charge of corporate underwriting.

The insurer took over as primary underwriter to General Group International, an independent California-based marketer of the additional coverage, in 1986.

Mr. Cass would not reveal the insurer's losses but said income from warranty underwriting fell far below initial projections and had produced only red ink since 1986.

Warranty coverage made up less than 2 percent of Maryland Casualty's $1.8 billion in 1989 revenues, Mr. Cass said, declining to give specific figures. General Group officials say the company's total premiums approach $200 million annually.

An industry consultant said Maryland Casualty's exposure could total more than $30 million on one BMW warranty alone.

Maryland Casualty took over as GGI's primary underwriter in 1986, succeeding Imperial Casualty & Indemnity Co. of Omaha, which took a bath on the warranties. "We thought we could do it better and achieve a profit," Mr. Cass said.

Maryland Casualty's income projections overstated the pricing of the contracts and the mix between old and new cars covered, Mr. Cass said. Making warranty projections is difficult because the industry is constantly changing, he said, especially as auto manufacturers -- in direct competition with independent insurers -- upgrade their extended-warranty offerings.

"Actuaries find it hard to make predictions when the benchmark is continually changing," Mr. Cass said.

As a result, the company was eager to get out. "This business falls somewhere between a toothache and hemorrhoids," Mr. Cass said.

Maryland Casualty had planned to shed the warranty business even before its 1989 sale to Swiss-based Zurich Insurance Group, he said.

Since some warranties run as long as seven years, it may take until 1997 for Maryland Casualty to complete its obligations to warranty holders. The total losses incurred by the insurer will not be known until that time. "I've got to wait until those contracts expire before I know my [total] loss situation," Mr. Cass said.

Maryland Casualty gave GGI 18 months to find a new primary underwriter, he said, but the California company was unable to find a replacement. It has since announced it is going out of business.

"We were unable to obtain new underwriting prior to Maryland's decision to stop accepting new business," Jerry R. Farrar, president and chief executive officer of GGI, said in a statement.

Maryland Casualty will continue to honor warranties written up to the October cutoff date, as well as all existing agreements, until their expiration dates. "We've got contractual obligations for business in process," Mr. Cass said. "After Oct. 15, Maryland Casualty will not accept any new business."

The insurer will hire the more than 100 GGI employees it takes to process warranty claims in GGI's Harbor City, Calif., headquarters. Both companies promised little interruption in service to consumers.

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