Robert Detlefsen, NAMIC, in PropertyCasualty360.com, May 18, 2016
Featured image: An auto repair facility. (SerhiiBobyk/iStock)
A NAMIC column in Property Casualty 360 extolling the virtues of direct repair program shops implies non-DRP collision repairers and their policyholder customers might commit insurance fraud.
And while that might be the most egregious part of the opinion piece, it’s not the only questionable one.
First, let’s get this out of the way:
There’s nothing wrong with direct repair shops. It’s a perfectly legitimate business decision for a shop owner to trade lower revenues on individual claims for the prospect of more volume through insurance referrals. And there’s nothing wrong with an insurer referring a quality DRP shop to a customer who legitimately has no idea whom to patronize.
But when the shop puts the insurer’s interests over that of a customer and OEM procedures for a safe and pre-loss repair, that’s a problem. When the insurer attempts to impose DRP-type concessions on an unaffiliated shop without granting any of the benefits, that’s a problem. When an insurer misrepresents non-DRP shops and complicates the process for their own policyholders, that’s a problem.
None of these concepts alleged in litigation, shown in media reports and described by the California Department of Insurance, made it into the Wednesday column by National Association of Mutual Insurance Companies public policy Vice President Robert Detlefsen.
So it’s important that insurers, customers and body shops realize that these are pitfalls in the current DRP structure, and also get the full story on Detlefsen’s claims.
As for what did make it into the column, let’s go through the whole thing point by point:
Each year, approximately 6% of drivers submit claims for comprehensive and collision damage to their vehicles, causing U.S. insurers to incur tens of billions of dollars in automobile physical damage losses. A large portion of these incurred losses is paid to automobile collision repair facilities, often referred to as body shops.
If an insurer has priced risk correctly, the customers’ premiums should be covering these costs. Whatever’s left or while you’re waiting to pay losses, you can invest and make Warren Buffet even richer. That’s Insurance 101.
In 2014, the last year for which data was available from the NAIC, insurers earned $69.6 billion in auto physical damage premiums and incurred 75.3 percent of that in losses and adjusting the losses.
We’ll throw in another 8.3 in general expenses, taxes and fees, and dividends back to the policyholders for an 83.6 loss ratio.
If it hadn’t been for “selling expenses” — 16.8 percent worth of annoying ads and other assorted items, some of which is admittedly necessary for competition — the insurers made 16.4 percent on insuring auto damage before investing any of their float.
To mitigate the costs of vehicle repair, insurers have created direct repair programs (DRP). While DRPs have existed since the 1970s, the most significant growth came in the 1980s and 1990s. Recent surveys estimate 44% to 50% of body shops participate in a DRP. Among the shops that participate, nearly 57% of sales are referred by insurance companies.
Despite the subsequent discussion of insurers seeking quality work with DRPs, it seems as though Detlefsen tipped his hand on the real point of DRPs, at least today: Cutting costs.
In a DRP, carriers identify and contract with body shops that are able to perform high-quality repair work. In exchange for referrals from the insurer, the body shop agrees to warrant repairs and provide consistently measurable standards of service and quality for each repair.
Any reputable shop warranties their work. The implication that non-DRP shops don’t is a sin of omission alleged in lawsuits against insurers.
Vetting shops for quality might have been an issue in the 1980s and 1990s when I-CAR, OEM collision repair procedures, and automaker networks of certified shops were in their infancy.
Today, most OEMs — most notably luxury companies, which right now might have the strictest standards — have a certified body shop network they feel has the training and equipment necessary to fix their vehicles.
As for DRP quality, well, that’s debatable.
There are several ways DRPs improve consumers’ claim experiences and increase the efficiency of handling insurance claims. Repair facilities are screened by insurers before they are included in DRP programs. The insurer may require that the shop meet standards related to equipment, training, service and pricing. Therefore, DRP shops are likely to provide higher quality repairs and better service than a randomly chosen shop.
Customer satisfaction scores are easily measurable, and that’s commonly done. However, we’d really like to see Detlefsen’s data on “higher quality repairs” and who’s checking that. Apparently, insurance companies are throwing post-repair inspectors much more business than we’d have expected.
While we understand he’s using it as a synonym for average, Detlefsen’s wording also prompts us to note that a customer or DRP-less insurer shouldn’t have to “randomly” choose a shop in an age of online reviews, ASE and Gold Class lists, and OEM certification networks.
Moreover, when using a DRP-approved repair facility, consumers are likely to receive faster repairs because time spent with claims adjusters and obtaining multiple estimates has been eliminated from the repair process.
It’s the insurers who might be requiring a second estimate as a way to find someone who’ll do the work cheaper, according to California’s insurance commissioner and apparently other state DMVs. Besides, if insurers have adjustors who know their stuff as well as Detlefsen says, they should be able to visit the shop and vet the existing estimate for accuracy.
Compared to repairs performed using non-DRP shops, the time from filing a claim to repair is typically shortened by about five to seven days.
The same efficient aspects of DRPs that enhance value to consumers also are likely to decrease costs. For example, expedited repair processes reduce claims costs by decreasing expenses for rental car benefits and by reducing the expense of hiring claim adjusters.
Decreasing costs really only helps the insurer, not the customer, who by definition shouldn’t have to pay anything to restore their vehicle to pre-loss condition aside from the deductible. (For now, we’ll set aside the question of whether an generic part allowed under a policy to replace an OEM part is by definition pre-loss.)
Cut costs too low or overlook items, and you run the risk of customer short-pays. This can be an issue with photo-only estimating, which eliminates an adjustor but can easily miss damage tied to crash energy management.
A particularly troubling aspect of the auto repair market is how accurately consumers differentiate quality of work across repair shops. The changing and highly technical nature of late-model vehicles virtually ensures consumers will struggle to assess the quality of a repair facility before an accident occurs. Even when the consumer has experience with a specific shop, if the shop does not maintain and periodically enhance its equipment and training, it could go from being a high-quality shop to a low-quality shop in just a few years.
We agree. See our quality discussion above. But from a corporate liability standpoint, the insurer can keep the savings from a shop not charging more hourly to keep up with those items but remain off the hook if quality suffers. The work is warrantied by the network shop, and the shop has the liability unless they’ve taken steps pre-DRP contract to redistribute it.
Insurers, on the other hand, interact with body shops every day. They employ professionals with the experience and technical expertise that are necessary to accurately differentiate across body shops based on expected quality and service.
GEICO promotional materials stress how little knowledge you need to land a job as a claims adjuster.
“You don’t need to know the difference between a radiator and an alternator before applying for this position,” one advises. “GEICO will provide the technical training you need to be the knowledgeable resource and point person for our customers. GEICO needs you.”
“I knew very little about cars before I became an adjustor. I pretty much learned everything through GEICO’s training,” another boasts in this video:
Policyholders also may benefit from added convenience when using DRP shops. DRP members often have the authority to begin repairs for the insurer without the need to wait for approval from adjusters or claims representatives. They also eliminate the need for insureds to get multiple competing bids for covered repairs.
The competing bids are insurer requests, and the delays are allegedly sometimes insurer-driven, too. nd don’t insurers owe customers the best service regardless of which shop they choose — a choice that’s a right in most states? Plus, if the”professional with the experience and technical expertise” is so hot, shouldn’t he or she know if a bid is appropriate or not?
By suggesting such shops to their insureds, insurers can reduce the price of insurance and increase customer satisfaction. For example, a 2006 J.D. Power and Associates survey of collision repair satisfaction finds a substantial difference in customer satisfaction index (CSI) between claimants using DRP body shops (CSI=793) and those that do not (CSI=726).
Insurers are in the process of raising prices now because of rising miles driven causing more crashes. They’re also reportedly eliminating shops from DRP programs because of oversaturation, which seems to contradict that argument.
Further, it is likely that vertical contracts between insurers and body shops reduce the instance of insurance fraud. The most common forms of insurance fraud committed by body shops, often in concert with consumers, are called “burying the deductible” and inflating damage estimates.
When body shops bury deductibles, they hide that cost in the estimate so that the insurer — instead of the insured — pays it. Inflating damage estimates involves charging for work that will intentionally never be completed and parts that will never be installed. They may also inflate the estimate by causing additional damage to the vehicle so they will be paid to fix it.
Because the DRP agreement enhances communication and aligns the incentives of insurers and body shops, the body shop is less likely to collude with its customers to defraud insurers. Because DRP networks partially align the interests of insurers and body shops and improve the flow of information between these parties, body shops gain less utility from colluding to commit fraud than those without DRP contracts. Hence, it is likely that DRP networks significantly reduce the price of insurance by decreasing the cost of fraud.
If you’re not on a DRP, you’re just one willing customer away from running a scam, if you haven’t already. That’s what seems to be implied here. Show us some data or anecdotes that connect these fairly egregious dots.
And if we’re talking potentially systemic flaws, the DRP structure by its nature and according to Detlefsen’s praise encourages cost-cutting and speed.
Questioning if those specific elements could lead to improper or incomplete repairs is logically appropriate given some of our examples above. Implying that anyone who isn’t directly an insurer’s business partner might cheat them is hugely inappropriate.
Finally, there’s three parties in an insured repair. Assuming nobody’s out to cheat each other, shouldn’t body shops be aligned with the customer before the insurer, and vice versa?
Laws affecting DRPs can and do differ across states. The main issues addressed by such laws concern the ability of insurers to require policyholders to seek repairs at a particular shop and the amount and type of information that is allowed (or required) to be communicated to the policyholder.
Despite the benefits they provide to consumers, DRPs have been the subject of protectionist legislation aimed at preventing insurers from effectively operating these programs. Some states have enacted or are considering laws that require insurers to obtain independent appraisals that needlessly extend DRP shop repair times and increase claim costs.
Considering that insurers seek independent appraisals for non-DRP shops to check their work, why shouldn’t the reverse be done?
Other states have enacted or are considering laws that restrict the ability of insurers to provide information to policyholders regarding DRPs. Courts in several jurisdictions have struck down these so-called “anti-steering” laws on constitutional grounds, implicitly recognizing the benefits consumers derive from DRPs.
Fortunately, some states have pursued a more consumer-friendly approach by allowing insurers to recommend that repairs be made at a shop selected by the insurer, while prohibiting the insurer from requiring or coercing claimants to use the insurer’s preferred shop.
The last of these is actually the case in many states. If all insurers followed that rule, then nobody would be seeking to modify it, California wouldn’t be demanding insurers back up their claims, and shops probably wouldn’t be suing insurers for tortious interference.
There’s definitely shops which certainly need to get their repair quality act together or quit taking newer-model (or any) vehicles, and there’s no excuse for fraud. But there’s plenty of collision repairers who don’t want to cede as much influence to insurers as a DRP shop but match or surpass DRP repair quality.
Disparaging them does them and insurers’ customers an injustice — particularly as insurers reportedly look to shed shops from DRPs.
Robert Detlefsen, NAMIC, in PropertyCasualty360.com, May 18, 2016
Featured image: An auto repair facility. (SerhiiBobyk/iStock)