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Giving car buyers the option to walk

From Tuesday's Globe and Mail


(Fernando Morales/The Globe and Mail)

This is a car commercial, but it isn't about the cars. It's about the people who buy them.

It was the week before last Christmas, and Vincent Beretta had just received by e-mail the new commercials for Hyundai's Assurance program, which lets customers who buy or lease a new car return the vehicle if they lose their jobs.

Hearing the words in the voiceover gave him goose bumps. “They totally got it,” says the CEO of Walkaway Canada, the Toronto-based developer and marketer of the assistance program.

The commercials, which were to air during the Super Bowl, were advertising Walkaway's own insurance product. Hyundai Motor America, the South Korean manufacturer's U.S. division, is the first auto maker to license it, offering it through its 800 American dealers under its own brand.

Until then, Walkaway had spent a decade slowly signing up auto dealerships to market its novel twist on a rainy-day policy: If you buy or lease a new vehicle and then lose your job or become ill, you can return the car and make no further payments, with no harm to your credit rating. Walkaway had built a network of more than 200 dealers, logging about $15-million in premium revenues last year. Now, Hyundai's endorsement promised to multiply Mr. Beretta's business – provided too many buyers didn't actually take him up on his offer.

A veteran car insurance salesman, he got the idea for Walkaway in 1998, after a conversation with a dealer friend. The friend mentioned that two customers had returned their cars before the end of lease term, and he agreed to take them back to maintain the client relationships. Still, he took a $6,000 hit for each, the difference between what the car was worth and what he would have earned on it throughout the lease.

Mr. Beretta saw an opportunity in insuring the difference between what a customer owes on a leased or financed car, and the vehicle's cash value. Known as negative equity, it was becoming a growing issue for dealers, as longer-term loans and new financing options such as zero down payment meant people were trading in their cars for newer models before they had paid them off.

Meanwhile, consumers liked having an out. “We know people are more likely to buy something they can return,” Mr. Beretta said.

Within 18 months of launch in 2000, Walkaway had captured nearly 30 per cent of Ontario's new-car dealers.

Participating dealers include the Walkaway insurance for free for the first year in every new car sale or lease, as an inducement to buy. At the time of purchase, the customer can buy extended or enhanced coverage; according to Mr. Beretta, about half the customers do so. (Policies offered through independent dealers are underwritten by ING Novex Insurance Co. of Canada). Dealers earn commissions on policy sales, but have to absorb the cost of the complementary period.

In 2005, the U.S. industry newspaper Automotive News wrote an article about Walkaway, and Mr. Beretta was inundated with calls from American insurance providers and car dealers. He decided to license the program for the U.S. market.

He chose Dallas-based EFG Companies, which offers financial and management services to car dealers. “The U.S. market is a difficult environment to navigate, and EFG had existing relationships with car manufacturers and dealers,” he noted. EFG pays a fee for 10-year exclusive rights to Walkaway USA, and royalties on Walkaway-related income.

Mr. Beretta always hoped to sign up an auto maker, but had no luck – until a board meeting at Hyundai America last October. The company's executives concluded that incentives weren't working: No matter how much free cash they threw at buyers, consumers were leery about making big purchases in an uncertain economy. Hyundai staff remembered Walkaway USA's proposal and got in touch with the company in November. By year-end, Hyundai took a one-year licence to offer the program through its U.S. dealers, paying Walkaway a royalty for every sale. The Assurance program kicked in on Jan. 1, and Mr. Beretta expects it will result in more than 200,000 policies this year.

With copyrights on Walkaway contracts, proprietary risk research needed by underwriters, marketing and training materials for dealers, and IT systems to manage policy distribution, Mr. Beretta had amassed a considerable amount of intellectual property that it would be challenging for a rival to quickly replicate.

The risk, however, is that if too many people end up returning their cars, the cost to the dealers and the underwriter will make the program financially untenable. Mr. Beretta concedes that more claims are being made on the policies since the economy tanked, but argues that the financing crunch has the upside of tightening lending criteria. “The people who qualify for loans are fairly secure.”

The Hyundai program has generated considerable press and industry attention. “Since Hyundai launched, everyone's eyes have been turning to the vehicle-return option,” he said. “Those who might not have gotten what we were doing are having that ‘Aha!' moment.” That includes other car makers: Earlier this month, Walkaway signed a deal with Kia Canada, which offers the program under the name Integrity Advantage.

Special to The Globe and Mail

Connect with Vincent Beretta

Vincent Beretta joined us to talk about his company's breakthrough. Click here to read the full discussion.

Expert Insight

"Other manufacturers are looking at this now, waiting to see how much traction the program earns for Hyundai before venturing in," says Richard Spitzer, managing director of the worldwide automotive practice for consulting company Accenture. Mr. Spitzer discusses the risks and rewards of car-return insurance. Click here on Wednesday to read the full interview.

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