'Tis the season for retailers to make their numbers, and it's been quite a few years since we gathered any data on the price of the service contracts that retailers so dearly love to sell with all their products. So this week we're beginning a process where we look at the relative prices of the products and the service contracts on offer this season, with an eye towards figuring out what the actuaries already know: what's the break-even price of a protection plan?

We decided to start with flat-screen televisions, which in years gone by were the bread and butter of the service contract industry. The process started with an online mystery shopping exercise at 11 major television retail chains: Amazon.com Inc., Best Buy Co. Inc., Costco Wholesale Corp., hhgregg (Gregg Appliances Inc.), Micro Center (Micro Electronics Inc.), Newegg Inc., Sam's Club, Sears Holdings Corp., Staples Inc., Target Corp., and Wal-Mart Stores Inc.

We sought out at least three 50-inch or 55-inch flat screen televisions from each, aiming to include a unit priced below $500, a unit priced between $500 and $1,000, and one priced above $1,000. But it wasn't always possible to do so. To reduce the amount of variables, such as the variations in loss cost between different makes and models, we aimed for a low-end unit made by either TCL Corp. or Vizio Inc., a midrange unit made by Samsung Electronics Co. Ltd., and a high-end unit made by Sony Corp.. But these brands were not always available from every retailer, so there were some LG units mixed in when necessary, and even some Kenmore-branded televisions. Then we sought out offers of service contracts with terms between one and five years.

Service Contract Administrators

Over the course of going through the offerings of 11 retailers, we came across seven different obligor/administrator/underwriter teams. We found Service Net and AIG at Best Buy and newegg.com; Warrantech, AMT Warranty and AmTrust Financial Services Inc. at hhgregg; and Asurion and CNA Financial Corp. at Walmart. Micro Center had The Warranty Group, and Sears had its own in-house operation. SquareTrade was in Costco, Sam's Club, Target and Staples. And depending upon the TV we looked at, Amazon.com had a competitive mix of plans from AmTrust, Assurant Solutions, and SquareTrade.

In all, we found 75 pairings of televisions and service contracts, with prices that ranged between $288 and $1,700. While most were 50-inch or 55-inch units, there were nine with screen sizes between 40 and 49 inches, and one that had a 60-inch diagonal screen size. But what was more important was that there be a balance in the price of the TV. We wanted both low-end and high-end units, as well as lots of mid-priced TVs.

As can be seen in Figure 1, of the 75 TV-service contract pairings, there were 25 with retail prices under $500, 22 with prices above $1,000, and 28 in between. We did not include either shipping, delivery or set-up costs in the price, and we did not include sales tax.

For the accompanying service contracts offered with these TVs, we noted three metrics. First, we noted the term of the service contract in years. Second, we noted whether the contract was in effect from the date of purchase, or from the date the manufacturer's product warranty expired. Third, we noted the price of the contract.

In Figure 2, we've charted the results of the first metric. There were 13 service contracts that offered one or two years of coverage. Another 26 offered three years. There were 14 four-year offers, and 22 five-year offers. None were longer.

Out of the 75 pairings, we found that 59 were effective from the date of purchase. In other words, they overlapped the product warranty, offering better coverage with perks such as free shipping to and from the repair center, cracked screen protection, surge protection, or some other peril not covered by the product warranty.

Only 16 took effect from the date of the expiration of the product warranty. And, we note, most of these were offered by SquareTrade Inc., through outlets such as Costco, Amazon.com, or Sam's Club. And, we further note, Costco provided buyers with a two-year product warranty, above and beyond the one-year warranties typically offered by the TV manufacturers.

In those instances, Costco offered two years of coverage, and SquareTrade offered an additional three years of coverage, for a total of five consecutive years of coverage. Interestingly, SquareTrade's service contracts at Staples were effective on the date of purchase, unlike the others.

The reason we mention this is because we found SquareTrade to have some of the lowest service contract prices of all, compared to the price of the product they were covering. The spread ran from 3% to 66%, but SquareTrade had half of the 22 offers where the service contract was priced under 10% of the product's price.

And at the other extreme, we noted that the three highest percentage pairings all belonged to Sears. For instance, the company sells the Sony model XBR55X900B 55-inch television for $1,390, and also offers a five-year service contract for $920. That means the service contract costs nearly two-thirds as much as the product it protects.

Granted, Sears Protection Agreements are in a class of their own. For instance with no buy-outs, the product could be replaced once a year for five consecutive years without terminating the service contract, because each of the replacements would also be covered until the original five years was up. Most other providers would say the contract is fulfilled after the first replacement or major repair.

Therefore, in the four charts below, we've noted the high and low-priced service contract providers. SquareTrade is noted in blue squares. Sears is noted in red triangles. And all the others -- AIG, AmTrust, Assurant Solutions, Asurion/CNA, and The Warranty Group -- are noted in plain gray diamonds.

Short-Term Service Contracts

In Figure 3, we've charted the 13 one- and two-year service contract offers. The price pairings ranged from a low of $37 for a two-year Electronics Protection Plan provided by SquareTrade on a $1,199 Samsung TV at Staples (3.1%) to an $80 two-year plan provided by AmTrust on a $350 LG unit at hhgregg (23%).

The average cost of a two-year plan was 11% of the TV price. Therefore, in this group, there were seven offers below average, and six offers above average. Three of the below-average offers came from SquareTrade. Sears did not offer any two-year plans. In this chart, the outlier to the extreme right was a $200 Geek Squad Protection Plan offered by AIG on a $1,700 Sony TV at Best Buy. But while the contract price was high, the ratio was merely average (12%).

We could have charted the results based on the price of the TV instead of by the duration of the accompanying service contract. But the results would not have changed by much. Of the 25 TVs priced under $500, service contracts ranged from 7% to 43% of the product price, with an average of 19%. Of the 22 TVs priced over $1,000, the offers ranged from 3% to 66%, with an average of 16%. And in the midrange, the offers ranged from 4% to 43%, with an average of 16%.

Therefore, any way you slice it, you are likely to find that there's quite a bit of variation in the price of service contracts compared to the price of the products they cover. However, based on 75 measurements, the average price of a service contract is around 17% of the TV's price.

Three-Year Service Contracts

The three-year plans were the most numerous of all. As can be seen in Figure 4, the 26 pairings ranged from a 4% offer by SquareTrade on a Samsung at Staples to a 45% offer by Sears for a high-end Sony model.

However, also note that Sears had a pair of offers that were closer to the consensus. A low-end Kenmore TV selling for $400 had a $95 service contract offer (24%) while a midrange Samsung had a $230 service contract offer (29%).

There was a noticeable cluster of service contract pricings at the $95, $99, and $120 levels. This was caused by the tendency of some service contract providers to use bands of product prices to determine the cost of the service contract. For instance, any TVs priced below $500 had one service contract price, while others priced between $500 and $1,000 had another price. In other words, the service contract prices were not based on the frequency or severity of the repairs or replacements. Rather, they were averaged based on the selling price of the covered product.

Four-Year Protection Plans

In Figure 5, the big surprise is the complete absence of any SquareTrade or Sears offers. We should note that technically, the SquareTrade offers in Sam's Club were for only four years, but members got the fifth year free. And since the retailers cater to club members, we assumed that most buyers were getting five-year plans.

Among these 14 offers, the service contract prices ranged from $39 to $200 while the TV prices ranged from $378 to $1,698. Therefore, the ratios ranged from a low of 7% (a $58 offer by Assurant on a Samsung at Amazon.com) to a high of 35% (a $150 offer by AIG on a $428 Vizio model at newegg.com).

The average was 15%, which was lower than either the three- or five- year average. This might have something to do with the fact that three of the plans were warranty extensions while 11 started on the day of purchase.

And again, notice the cluster of service contracts offered at the $150 price point. Once again, this is a product of the band pricing adopted by several administrators, where the service contract for any TV priced between X and Y gets a Z price tag. Since there will be several TVs priced between X and Y, there will be numerous instances of Z, in this case, $150.

The Five-Year Plans

Finally, we have 22 five-year plans to discuss. In Figure 6, like in Figure 4, we once again see Sears in the upper right and SquareTrade in the lower left. The difference is, this time 13 of the 22 offers are from SquareTrade, while three are from Sears and six are from AIG or AmTrust. The average ratio is 21%, and all of the SquareTrade offers are below it, while all of the AIG, AmTrust and Sears offers are above it.

As was mentioned, Sam's Club gives a free fifth year of service contract coverage to members who buy four-year plans, and Costco gives a free second year of product warranty coverage to its members. The first drives up loss cost, while the second diverts at least a year's loss cost from the service contract provider to the retailer. And we also note that of the 16 instances where coverage begins after the product warranty expires, 13 of those are in this category (the other three were in the four-year cohort).

Shopping Expedition Continues

It's early days in our online mystery shopping expedition, so we're not going to draw too many conclusions here yet. Our plan is to spend the weeks ahead looking at service contract prices paired with several different kinds of electronics, computers, fitness equipment, and household appliances. We want to find the averages and the extremes, and see if they fit any particular pattern.

In last week's newsletter, we detailed many of the reasons that the 2006 advice of Consumer Reports to not buy extended warranties no longer holds. Here's an additional reason: if a reputable obligor is willing to protect a $1,500 television from defects and even damage for five years for only $100 (which in many states would be less than the sales tax), and if they're willing and able to pay all legitimate claims, who's to say that's a waste of money?