Modeling total expenditure on warranty claims

TL;DR

This paper develops a statistical model to approximate total warranty claim expenditures over a fixed period, considering different warranty policies, and demonstrates its application using real automotive data.

Contribution

It introduces a novel approximation method for warranty expenditure distribution and a data-driven parameter estimation approach for practical use.

Findings

Effective approximation of warranty expenditure distribution.

Applicable to different warranty policies.

Validated with real automotive warranty data.

Abstract

We approximate the distribution of total expenditure of a retail company over warranty claims incurred in a fixed period [0, T], say the following quarter. We consider two kinds of warranty policies, namely, the non-renewing free replacement warranty policy and the non-renewing pro-rata warranty policy. Our approximation holds under modest assumptions on the distribution of the sales process of the warranted item and the nature of arrivals of warranty claims. We propose a method of using historical data to statistically estimate the parameters of the approximate distribution. Our methodology is applied to the warranty claims data from a large car manufacturer for a single car model and model year.