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.
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. 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.
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. 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.
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.
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.
|The carrier advantage
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. 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.
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).
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.
|State regulation
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.
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.
Robert Detlefsen, Ph.D., serves as the vice president for public policy at the Indianapolis-based National Association of Mutual Insurance Companies. Opinions expressed in this article are his own.
Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader
Your access to unlimited PropertyCasualty360 content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Breaking insurance news and analysis, on-site and via our newsletters and custom alerts
- Weekly Insurance Speak podcast featuring exclusive interviews with industry leaders
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the employee benefits and financial advisory markets on our other ALM sites, BenefitsPRO and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
