The challenge for online warranty providers is the same as the challenge for consumers, finding the right blend of coverage and price. With competitive offers often one click away there is constant pricing pressure. This is good for the informed consumer as he/she can compare warranty offers including the strength of the underlying issuer.

The challenge comes from consumers who shop only based on price. While price is only one dimension of the warranty offer, it is the one weighed most by many warranty shoppers. These consumers often end up with warranty products that under serve their needs. For example, they may find that the warranty they purchased is not cancelable, contains restrictions on transferability, has per visit deductibles, caps its payouts, etc.

Worse yet, as customers in the Warranty Gold, National Warranty Group and other cases have discovered, they purchased policies that suffered from more fundamental flaws. In these cases, discussed in more detail here, the warranty underwriter failed to adequately price the risk of the underlying warranty payouts. The result in these cases was the default of the underlying warranty insurer and/or administrator, policies that may now be worthless, and the loss of premium payments.

As a further example, of six warranty providers featured in BusinessWeek.com's April 2002 article entitled "Old Car, New Warranty: Extended coverage is available well after you buy", three had either failed or were no longer selling warranties. Not surprisingly, they were three of the four lowest priced providers in the table below (from that article).

In general, if you are considering a warranty that is priced substantially below the balance of the market, you may be buying trouble. While there are some differences, most diversified warranty providers have similar warranty loss costs. That is, when a vehicle fails, replacement part and labor costs will be, on the aggregate, similar. Further, while some administrators are more efficient than others, most of these providers have similar administrative costs. As a consequence, the cost basis for quality warranty products runs in a fairly narrow band.