Can Co-op help stop the extended warranty rip-off?

Fifty years ago, when you bought an electrical item, there was every chance that it might pack up a few weeks or months later. Back in those days, toasters didn't cost a tenner either - or at least not in today's money. Electrical equipment was more expensive and less reliable.

The insurance industry galloped to the rescue with extended warranties - offering to protect people against the cost of their new washing machine or TV from breaking down. And they used to be very popular add-ons.

But in recent decades, electrical appliances have become much more reliable - and somewhere along the way, extended warranties became akin to the PPI of the high street retail market. Shop assistants were heavily incentivised to tack on a warranty to each product sale, and with claims levels falling, they became a real cash cow for retailers.

Ineffective regulators

Around 10 years ago, the Competition Commission was asked to look into the problems in the sector. Its conclusion was to force shop assistants to make it clear that they didn't have to buy a warranty - and to let them know that they could shop around. They also extended cooling off periods, so that you had 45 days to cancel your warranty after you'd bought it.

But these remedies didn't have much impact, and two years ago, the Office of Fair Trading took yet another look at the issue, and forced the big players in the market to get behind a new extended warranty comparison site.

I've no idea what the traffic levels are - but I'd be amazed if the OFT's comparison site has had much impact on the problems in this market either. Until regulators ban retailers from selling extended warranties at the same time as electrical products - we're likely to continue to see many consumers overpaying, and even buying warranties when they needn't have bothered.

The Co-op's plan to disrupt the market

Nevertheless, an interesting move announced by the Co-op today could put some pressure on its competitors - Co-op Electrical plans  to start selling extended warranties at cost. What that means in practice is yet to be seen. But for products such as TVs, which these days are more reliable than ever, it's likely that the cost of buying a warranty through the Co-op will be considerably cheaper than it is through most of the other retailers on the market.

Better still, it will provide a benchmark to allow customers to see the extent to which companies are profiteering. The OFT's comparison website already does that to some degree. Tesco will currently charge you £150 for a five year warranty on a £1,000 plasma TV, while Argos will charge you just under £300 for a three year product - that's twice the price for a much shorter term of cover.

Even Tesco's £150 looks steep, given that less than 1% of TVs break down in the first five years. But hopefully that's what the Co-op's new pricing will expose.

It's a shame that after more than a decade of regulatory investigations that the extended warranty market continues to offer such poor value to consumers. My guess is that the regulators will have to revisit it at least one more time before it starts working well - by which time thousands more people will have overpaid or bought a policy that doesn't cover them when they need it.