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Letter to the Editor

Unresolved Issues

Not every issue gets neatly wrapped up as another year comes to an end. Here is a look at some unanswered questions that will still be facing the industry in 2005.

Contrary to how it sometimes appears on many of the year-in-review shows that start running at this time of year, the end of the calendar years rarely results in a neat and tidy ending to many issues. As 2004 draws to a close, it is clear that for the collision industry, a lot of issues remain unsettled, a lot of questions remain unanswered and left for the coming year.

A few examples:

What is the future of insurer-owned shops?

Despite a flurry of legislative activity around the country, Texas remains the only state to have passed tough regulations on insurer ownership and operation of collision repair shops.

That 2003 legislation, of course, resulted in an immediate lawsuit against the state by Allstate and its Sterling Collision Centers chain of shops. The trial took place this fall, and now the industry waits for the judge's decision, expected shortly after the first of the year.

There are those who view this as one of the biggest non-issues of the past several years: Regardless of the ruling, they say, few if any other insurers have the resources or interest in owning shops. Sterling, in any case, is likely to enter only a limited number of markets; and, given most insurers' experiences owning shops in European markets, it is not an experiment likely to last long-term.

Others, of course, view the situation very differently. Insurer attempts at shop ownership in Europe were largely based on the wrong model, they say, often focused on one or a small handful of very large-box locations rather than this solution (Sterling's model) of multiple but smaller shop locations that are easier to manage and operate. Insurer ownership of shops not only reduces the insurer's costs for vehicles repaired at those shops, but also gives the insurer more leverage over other shops in that market. And there's inherent conflict-of-interest that can leave the vehicle-owner out of the loop when the payee and repairer are one and the same.

No matter which side is right, the decision in the Texas case seems likely to play a big role in which will spread faster in 2005: insurer-ownership of shops, or state legislative efforts to thwart it.

Which way will the non-OEM parts market head?

As another year nears its end, the industry is still waiting for a decision by the Illinois Supreme Court in the 1999 $1.2 billion verdict against State Farm over the use of non-OEM parts. The industry has had plenty of time to debate what impact the decision - whichever way it falls - is likely to have on insurers' push for use of the parts, and with the wide variety of theories on both sides, someone will no doubt get to claim they had it predicted all along.

The State Farm case aside, another aspect of the non-OEM parts issue that seems up in the air as the year ends involves headlamps. CAPA in recent years developed standards for non-OEM lighting, but it wasn't something the parts manufacturers embraced.

Last spring, CAPA sent some of the most widely-used non-OEM lamps to an independent lab for testing - and reported when those lamps didn't comply with Federal Motor Vehicle Safety Standard (FMVSS) 108, the primary performance measure by which all lamps are measured.

This has parts makers, distributors and even some insurers scrambling. How the issue is resolved in the coming year could be as interesting to watch as the tumult the Illinois Supreme Court ruling - whenever it comes - will no doubt bring with it.

Are DRPs dead?

The question, at first, seems almost ludicrous. After all, a growing number of insurers have direct repair programs, a growing (for now) percentage of shops participate in them, and a growing percentage of most insurance claims are handled through a DRP.

But the question becomes a little less clear after spending a few minutes talking to Sam Mercanti. Mercanti, the president of CARSTAR Canada, argues that the DRP model does not work any more. The problem, Mercanti argues, is that volume is the name of the game, and while DRPs in theory should provide that volume of work, there is no guarantee that they will.

Mercanti sees fewer DRP agreements in the future and more "capitation" or "shared risk" agreements like the CARSTAR franchise has developed with some Canadian insurers. Under the agreements, the insurer agrees to supply a certain volume of work to the CARSTAR shops. In exchange, CARSTAR agrees that overall average repair costs will be at or below an agreed-upon amount.

If the insurer fails to fulfill the promised claims volume in each of the four geographic regions, at the end of the year it has to write a check to CARSTAR. If the average repair cost for the year exceeds the agreed-upon level, the CARSTAR corporate organization - not the individual shops - has to write a check to the insurer.

Mercanti said one such agreement is in its fourth year, with new numbers for each side agreed upon each year. The first year CARSTAR "got hit hard," under the agreement, he said, and had to pay the insurer. The next two years, CARSTAR kept up its end of the agreement and received a check from the insurer.

It is not a perfect model, Mercanti admitted, but he believes it offers benefits for both insurer and shop that the current direct repair program model does not. Because of that, he foresees a growing number of shops and insurers moving away from DRPs to "shared risk" agreements.

Will keying of estimates ever end?

As described elsewhere in this issue, the Society of Collision Repair Specialists (SCRS) and the Collision Industry Conference (CIC) continue hammering on what should really be a no-brainer for this industry: the ability of shops to download, rather than re-key, an estimate prepared by an insurer.

Like so many issues involving electronic commerce in this industry, the problem is far less technical than it is financial: Who will pay for (and who will benefit from) making this happen? A CIC committee calculates that rekeying costs shops almost $18 million. In 2005, we'll find out who will actually benefit helping take that cost out of the system. "Call me cynical, but it ain't going to be the shops," one CIC regular told INSIGHT.

How will the OEM service and repair information battle play out?

For the most part, the OEM websites offer independent repairers a fair amount of information. How easy and cost-effective it is to use the sites varies more widely - and there is definitely far more information of use to mechanical shops than to collision repairers on the sites. But as was clear from a recent task force meeting in Las Vegas to discuss access to OEM information, with only a few exceptions, the automakers are at the table and appear to be working to make the sites more complete and reasonably-priced.

The bigger question, of course, is why is that the case? Is it, as many believe, because they hope voluntary cooperation will stave off a federal law requiring them to open up the information? And if that's the case, what will happen if they perceive that the threat of such legislation has gone away (particularly if at that time they can also point to the fact the sites aren't being used all that heavily)?

That's where the Automotive Service Association (ASA) has gotten itself in a bit of muddle. ASA crows that it was its agreement with the automakers that led the OEMs to voluntarily establish their information websites. There is no longer a need, ASA believes, to push for the legislation that the association had supported and that is still being pushed by many automotive aftermarket and small business groups. Why force something through legislation if it is being done voluntarily?

That argument makes some sense to many in the industry, and if ASA had completely backed out of the fight over the "Right to Repair" legislation, even those disappointed by the decision would at least have to admit there was some logic behind it. But what has confounded even many ASA members and supporters is the decision by ASA to actively oppose the legislation.

The association distributed press releases and photos in recent months, showing its top leadership meeting with federal lawmakers to tell them, among other things, that the "Right to Repair" legislation is no longer needed.

It will be interesting in 2005 to see not only if proponents of the bill are able to maintain the momentum they have had in developing legislative support for it, but also if ASA is able to convince its members that fighting the bill - which many see as key to keeping the OEMs at the table and ensuring that the information keeps coming - is really in the industry's best interests.

A Sure-Fire Prediction for 2005

When the answers to all of these unresolved questions are likely to be known is unclear. But we are firm on this prediction: Look for more on these issues in the pages of INSIGHT in 2005.   o

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