Insurers to offer more service; drive down severity

Insurers to offer more service; drive  down severity

He laughs when he's asked about Progressive's "Concierge" program. His shop has participated in this DRP program's trial run since last fall. "It makes me think of a twist on that old Oldsmobile ad slogan: 'This is not your father's DRP'," said the second-generation East Coast shop owner who spoke about the Progressive program on the condition that neither his real name nor his business location (not even the state) be revealed. 

Progressive's twist on the concept of direct repair programs (DRPs) essentially does away with shop-to-customer contact. The vehicle owner turns the car over to Progressive, which prepares an estimate and calls a participating shop. The shop picks up the car, repairs it and returns it to Progressive for delivery to the customer. The program is being tested in Virginia, Ohio, Pennsylvania and Florida.

Appeals to younger people

"My dad was a reluctant participant in DRPs," said the shop owner. "Me, I've always seen them as an opportunity, probably because it was clear by the time I got involved in the industry 11 years ago that they were here to stay. There are obviously some things I'm not wild about with this Progressive deal, but [Progressive] seems like a real mover in the insurance industry; it's offering something appealing to people - especially young people - that other insurers aren't. I felt that getting in on this from the beginning, maybe helping shape it some, was sort of like getting in on the ground floor of something that's really going to grow."

Shops participating in Progressive's "Concierge" program are tight-lipped, saying part of the agreement with Progressive is that they are not allowed to disclose the terms of the agreement. But for the consumer concerned with convenience and not overly concerned about how their insurer's interests may differ from their own, what's not to like about the program?

It may actually be the insurer, however, who determines that the program has its downsides. "For Progressive, there is no 'they' or 'them' now, if a customer is unhappy about the repair of their car," one industry observer says. "Progressive, to the consumer, is repairing the car, so it's Progressive that customers will be unhappy with, not a shop. Progressive won't have anyone to point to but themselves."

These comments echo what others are saying about DRPs in general: That a sense of change is in the air. Talk with shops and insurers around the country and you'll hear about five trends in DRPs that are occurring now or will be soon. Some are more apparent than others, but all will likely have a significant impact on the industry.

Percentage of DRP jobs is growing

The percentage of claims run through DRPs is increasing. This trend comes as no surprise to anyone. As recently as 1996, claims handled through DRPs amounted to only about 8 percent of all insurance-paid repair work. Within two years, that figure had more than doubled to 20 percent and is expected to be above 30 percent this year.

The largest insurance companies are already well over this 30 percent mark. Allstate runs 37 percent of its claims through its 3,500 "Priority Repair Option" (PRO) shops. Nationwide makes no secret that it hopes to increase the percentage of claims (already at 31 percent) handled through its DRP (which currently has 1,900 participating shops). Farmers says 40 percent of its claims are handled by its 2,200 Circle of Dependability (COD) shops. USAA has 1,600 DRP shops handling a whopping 45 percent of that company's claims. And State Farm, which doesn't like to call its Service First program a DRP, reports that 47 percent of its claims are handled through the program (open to any shop meeting facility/equipment/csi requirements and agreeing to the program's terms and conditions, which at least 18,000 shops do).

Progressive's twist on the concept of direct repair programs (DRPs) essentially does away with shop-to-customer contact. The vehicle owner turns the car over to Progressive, which prepares an estimate and calls a participating shop. The shop picks up the car, repairs it and returns it to Progressive for delivery to the customer. The program is being tested in Virginia, Ohio, Pennsylvania and Florida.

Few are expecting a slow down let alone a reversal of this trend, with predictions that by no later than 2004 the balance will tip, with more than half of collision repair work going through direct repair channels.

Pressure to control severity increasing

The downward pressures on severity are building. "Farmer's just told us yesterday that we were going to be "graded" on the percentage of our alternative parts usage," an Oregon shop owner who has participated in Farmer's COD program for eight years said. "For a long time, Farmer's was one of the best programs, in my opinion, because it didn't seem to be all about the money. That's definitely changing. They haven't even commented on the CSI (customer satisfaction indexing) data we've been providing after they made it a requirement 18 months ago. I talked to one COD shop who's never started tracking that, and they haven't said a word to him about it. But they're really looking at costs."

As the world turns

Again, this trend isn't surprising to anyone who has watched the auto insurance industry's investment returns fall and "combined loss ratios" climb. (The "combined loss ratio" divides the total costs of all claims expenses by the premiums the insurer receives.) Combined ratios for the auto insurance industry as a whole now hover at 1.14, up from 1.07 of recent years. That means for every $1 in premiums insurers take in, they're spending $1.14.

"They used to operate at a 1.09 or 1.07 [combined ratio] and offset that with investment income and they were fat and happy," said Roger Wright, a former insurance company executive now with the CARSTAR repair shop chain. "But they aren't any more. If you look at your own current investment portfolio, it's not looking too good. So insurers are looking to cut their costs. Three years ago, it was all about customer service, CSI, retention, treating that customer right. Today, it's once again all about loss cost and severity."

Efforts to cut severity result in the cost-containment trends shops are all too familiar with - but also generally lead to more dramatic changes as insurers become more open to "the next big idea" that will turn things around. DRPs were the solution insurers latched onto in the late 1980s and early 1990s; Progressives Concierge program and Allstate's acquisition of the 40-shop Sterling Collision Centers chain are evidence that while beating up DRP shops for dollars is likely to continue, it will probably be coupled with other changes.

"We're trying to take some of the overhead out for both of us, not just for the insurance company," Bill Hardt, assistant vice president of property damage claims for State Farm, recently told a gathering of shops. "The customer is demanding more and more every day. We've got to quit looking at just you and me and look at that customer and what they are demanding, and find a way to give it to them without increasing the cost."

Is the agent out of the picture?

The role of the insurance agent is changing. In the past, once a shop was participating in a DRP, making it pay off wasn't all that complicated: Keep yourself front and center in the minds of the insurance agents who took claims calls from vehicle-owners and referred them to shops participating in the program. But increasingly those "first notice of loss" calls aren't going through agents but through centralized call centers.

"You can't even identify who actually manages a call center, so you can't call on them,"said Dan Greenwald who operates two large repair centers in San Diego, California.. Greenwald built his second shop in an industrial area with no street exposure after he had been assured by DRP partners that business would be sent his way because a shop was needed in that new area. "Build it and they will come, that was the promise," said Greenwald. But the reality was, when the shop opened, the call centers didn't immediately send the business. Some still don't.

"They would send business from our back yard to shops several miles away because of their screwed up zip code maps. We're in a little corner of San Diego, but we really serve the City of Chula Vista, yet Chula Vista zip code business wasn't being sent to us," said a frustrated Greenwald. He sent the insurers certified letters, zip code maps, anything he could think of. "It's almost two years later and we're still fighting it. One insurer actually has us down as servicing Tecate, which happens to be in Mexico."

Working with 'direct writers'

For shops that are DRPs for insurers who sell only by phone and website and not through agents ("direct writers"), reaching up higher in the claims hierarchy will become a crucial part of the marketing process.

"I direct all my marketing to the DRP segment because I don't think the agent network is going to be the key piece anymore," said Dennis Kennealy of Master Collision Group, a 5-store chain in the Minneapolis. "We have a very solid agent base of referrals, but most [direct repair work] comes directly out of the claims centers, and that's where we feel the relationships are going to be built. Maybe not as much today - I would say 80 percent of the business is still dictated by agents - but I think in the next year-and-a-half to two years that's going to totally change."

"The change," Kennealy said, "comes down to one issue: customer retention." Larger insurers, he believes, are no longer going to place responsibility for customer retention in the hands of independent businesses - agents - that may base their referral decisions on such things as "the hunting and fishing trips used as enticements" by shops in his market. "In fact, I know that a number of insurance companies are tying [agent] bonuses to customer retention," he said. "That fishing trip isn't going to seem so appealing to an agent if he loses his quarterly or monthly bonuses because he's sending cars to a shop that's going to have issues." Kennealy isn't alone in his view.

"We have to start looking higher up in the insurance companies and marketing the claims manager to let them know we're here and can do the job," says Ed Dahm of Craftsman Body & Paint in Portland, Ore. "Younger people are more used to buying through the internet and things like that, so I think eventually the role of the agent is going to be gone," agrees Geralynn Kottschade, general manager of Jerry's Body Shop in Mankato, Minn.

The emergence of shop networks

The way DRP relationships are formed is changing. Just as customer referrals are moving out of the local arena, insurer-shop relationships are being established more and more on a regional or national level. Shop consolidators able to handle significant volume in multiple markets can often offer a "value proposition" higher up the claims chain of command than a single location repair operation.

But increasingly, other entities are working to establish networks of independent shops in order to market that network to insurers.

"Marketing has gone 'corporate to corporate'," according to San Diego's Greenwald, which explains why he recently signed-up with FIX Auto USA, a network of independent shops based in Southern California. After a spate of recent sign-ups, FIX now boasts over 100 member shops in 15 of the country's largest metropolitan areas and offers its members a centralized call center to serve their insurance customers.

In the United Kingdom, paint manufacturer Akzo Nobel has created a separate company to take claims calls for insurers, make claims assignments to shops in its program and offer the insurer central billing.

PPG's CertifiedFirst network

PPG began running ads in consumer magazines last fall touting its "Certified First" network of shops and recently announced its first nation-wide relationship with a major insurer. Joining the network requires an on-site audit of shop equipment -- conducted by Underwriters Laboratories Inc. (UL) - and a CSI prgoram. There is also a $2,000 annual fee, with reduced per-location fee for multi-shop operations. Certified First shops must be using one of PPG's top three product lines: Deltron, Global or AutoColor. All three have earned the Good Housekeeping Seal of Approval, a fact played up in the signage, consumer marketing and point-of-sale materials available for use by Certified First shops.

PPG's Mary Kimbro said the program is designed to help shops market themselves to insurers as well. "It is our goal to be recognized not only by consumers but insurance companies as a place they want to do business with," Kimbro said.

LYNX to enter field

LYNX Services, a subsidiary of PPG that manages auto glass claims, announced recently that it is moving beyond glass claims management into collision repair claims management this year. "With more than 3 million [glass] claims handled annually, LYNX Services has the expertise to streamline the entire auto insurance claims process," said Jim Latch, president of LYNX Services. "Participating body shops will have access to repair work from multiple insurers, and consumers without a preference will be given a choice of participating body shops to complete their repairs."

On the glass side, LYNX processes claims calls, schedules repairs, performs audits, and manages warranty claims. So if LYNX begins handling similar duties for insurers on collision repair claims, will it channel that work to shops in PPG's "Certified First" network? PPG says that while there may be overlap between LYNX and Certified First, there won't be "an exclusive agreement between the two."

Blurring of traditional roles

The lines between insurer and repairer are becoming fuzzier. Ask a consumer 'who fixed your car?' after an accident and their answer might not be as cut-and-dried as it once would have been. They may say Sterling Collision Center, without realizing their insurer's subsidiary, Allstate Non-insurance Holdings, Inc., owns the 40-shop chain. Or they might say Caliber Collision Center, not realizing a California insurer has a $30 million investment in the 62-shop chain. Or they might say Progressive Insurance fixed their car and not have a clue what shop did the actual work.

Progressive and Allstate's recent moves demonstrate that insurers are interested in not just controlling loss costs but also controlling (and improving) the customer's experience, according to Brian Sullivan, editor of two insurance industry newsletters. Insurers, he said, are seeking more control of the customer relationship. "It's not good for you, but it is the reality that I think you have to deal with," he said.

The HMO body shop

A regional manager with another large insurer also admits that the increasingly micro-managing his company does of the procedures followed by shops under its direct repair program is beginning to make him uncomfortable.

"The whole idea to me of DRPs was that we watch the dollars, not the nickels and dimes," the manager said. "Now we seem to be going down the same path the medical side of the insurance industry did, and the public has said they don't like doctors and insurers being too intertwined. I don't think this is a trend that will be good for shops or insurers."

That question - whether any of these five trends in DRPs are positive or negative for the various players in the collision industry - is one that will likely be the focus of much debate over the next two years.

John Yoswick is a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988. Autobody News editor Richard Neubauer also contributed to this article.

John Yoswick

John Yoswick is a freelance writer and Autobody News columnist who has been covering the collision industry since 1988, and the editor of the CRASH Network... Read More

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