Home Warranty Vs. Home Insurance

Homeowners insurance claims from sinkholes rising in Florida
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A home warranty is one of the most mystifying products in existence, but it has been gaining a lot of success as of recent. ServiceMaster Global, which owns American Home Shield, the largest and most recognizable company in the home warranty industry, has reported a revenue of more than US $1,000,000,000 in 2016! Such incredible revenue for a company of that type have lead the decision makers to , a testimony to its incredible popularity. American Home Shield employees 1,600 men and women in Tenessee.

What is a home warranty?

 Essentially, a home warranty is a service agreement that takes care of fixing home systems and electrical appliances. It normally costs anywhere between $30 to $120 depends on which components and appliances the customer owns and is interested in including within the service contract. There is normally an additional charge per service call. Additionally, the liability is rather capped so if a $10,000 pool motor goes bust, the warranty company will compensate the customer up to $500 or $1,000 but not for the full amount (depending on the T&C’s of course).

Home warranty Vs. homeowners insurance: Which is more profitable to engage in?

 Home warranty is not a form of homeowner’s insurance. Unlike a homeowners insurance it is not mandatory. Unlike homeowners insurance which 95% of U.S households own based on iii we estimate no more than 20m American households with home warranties. The do not go anywhere near the same regulatory scrutinization as insurers go because it is after all, it is not an insurance but a service agreement, just like the one you get for leased cars.Homeowners insurance vs home warranty

Without the regulatory hurdles, and with a much less complexity than homeowner’s insurance, in spite of relatively lower premiums, it may very well be a more profitable business to engage in than insurances, although it has much smaller potential. It is estimated the entire market is USD 2bn, and with ServiceMaster’s American Home Shield taking up half of that,  there is not that much meat to bite into.

 Where is home warranty popular in?

Based on Google trends, the product has gained popularity only in particular states. Arizona is on the top, followed by Nevada, Texas and Utah. Since the product is more effective on houses rather than condos, it makes perfect sense.

Home warranty – bad reputation?

 A lot of home warranty companies have been getting somewhat of a bad reputation. Industry professionals said that “they are not worth the paper they’re written on”  and TV news have had some on such companies. Does it mean all companies are necessarily bad or that all types of home warranties aren’t “worth it” for the customer? Of course not. It all depends on the house components that clients has, how likely are appliances to require fixing in the near future, and the premiums paid.

 

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