Originally Posted by ezmaass
I've had very good luck with my BMWs over the years - never took out an extended warranty. It's essentially a numbers game. If the warranty company is doing their job, the premiums will need to be larger than the payouts, on average. That said, "average" is the operative word - some will absolutely get their money's worth, while (many) more will likely never see their value.
If you've ever traded options on the market, it's very much a similar concept - most options expire worthless or get traded (to unwind) at a loss. This is why options sellers, who are akin to the insurers, often walk away winners more often than options buyers, who are akin to the insureds.
That said, sometimes insurance (or warranties) do pay off. It's about understanding the math and risks better than the insurer. That's a tall order in many cases, especially where there's plenty of data available to the actuaries and a lot less available to you!
But it CAN make sense. My R8 is the first car I've purchased an extended warranty on in my life. I know the cars well, including lots of great sources of data on what often fails, how much it costs, etc. One of the most popular failures is the magnetic ride shocks. Each costs ~$2k in parts, alone, or about $8k for all four. They're almost guaranteed to fail after 5 or 6 years. In my case, I was able to get a 10 year / 100k mile warranty for far less than the replacement cost of just the shocks, and I was also able to obtain it in an exclusionary warranty that included coverage for shocks. So, it was a no-brainer on that alone. After I started adding in other popular failures, failure rates, and costs, it was MORE than a no-brainer.
Roughly a year after I purchased that warranty, folks are now being quoted close to double what I paid - in some cases even more - for the exact same warranty with very like situations (year, mileage, etc.). This is simply, in my eyes, the insurance / warranty company's data finally catching up and prices being adjusted to account for their payouts.
In the case of the R8, it's low production volume, and being a member of a tightly knit community, it may very well be viable to have more comprehensive data than a random warranty company / underwriter who typically deals in volume and just may not insure / warranty enough of these cars to gain similar perspective. So, it may be possible, in some of those scenarios, to beat the insurer at the numbers game.
How to know if you're getting a good deal? Well, I think you'd need to approach it like the actuary - similar to how a company does a risk quantification analysis. The FAIR model is one such approach - if you want to take the time to dig into it. But basically you're translating risks (along with expected losses, annual loss expectancy, etc.) into quantitative financial terms. If you can get someone to sell you a policy that covers that risk for less than your own internal carrying costs, then you buy the warranty. If not, then you self insure. Deciding whether to self insure or purchase insurance on certain corporate risks is something a CISO, CRO, and CFO routinely collaborate on... but the same process can be applied to smaller scopes, such as a car warranty.
So, long story short, whether it makes sense or not: "it depends." You need to have very good data and a handle on the "inputs" to your risk model to be able to begin calculating what your risks translate to in terms of financial losses over some period of time. The easy part is then comparing your risk carrying costs, as I mentioned, to that of a quoted policy premium.
But very much like a casino, or my previous analogy to the options markets, beating "the house" is extremely difficult. If the actuaries are doing their job correctly, the odds are not in your favor. The longer the car has been around, the more of them they've written policies on, the better their data is, and the less likely it is that you'll beat them on a pure numbers game. That leaves only the possibility that you happen to own a car which has a standard deviation (or more) of additional costs over the life of the policy, and therefore you "win" simply due to an out-sized set of repairs... not something you'd hope for, in any case.
If you do choose to buy a policy, Fidelity's Platinum policy has a decent reputation. I'm not sure if BMW underwrites their own plans, but you may want to check with them - in some cases, it may help ease the claim process if that's the case. Lastly, I'd say to look for an exclusionary warranty, which calls out what's excluded (in hopefully a short list) versus the typical budget warranties that list a finite number of parts / repairs that are covered - these are the plans that typically surprise the owner with many uncovered expenses.
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