PRICING A MOTOR EXTENDED WARRANTY WITH LIMITED USAGE COVER

Abstract Providers of motor extended warranties with limited usage often face difficulty evaluating the impact of usage limits on warranty price because of incomplete usage data. To address this problem, this paper employs a non-parametric interval-censored survival model of time to accumulate a specific usage. This is used to develop an estimator of the probability that a provider is on risk at a specific time in service. The resulting pricing model is applied to a truck extended warranty case study. The case study demonstrates that interval-censored survival models are ideal for use in pricing motor extended warranties with limited usage cover. The results also suggest that employing a usage rate distribution to forecast the number of vehicles on risk can be misleading, especially on an extended warranty with a relatively high usage limit.

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