Modeling total expenditure on warranty claims

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.