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Letter to the Editor

The Future of DRPs

Industry views on where the insurer direct repair programs should go from here - and why

No doubt sparked in large part by State Farm’s changes to its direct repair program over the last couple years, the evolution (some would say devolution) of DRPs has become a primary focus of discussion within the industry.

Here’s a look at where some industry observers see such programs going in the years ahead.

“I think we might see someone pilot a program where participating collision repair facilities will be given a standard flat fee to repair vehicles regardless of the amount of damage,” said Dan Risley, executive director of the Society of Collision Repair Specialists (SCRS) when asked to look at where DRPs might be in five or 10 years. “The thought behind that is that it would simplify the repair process, reduce cycle time and reduce overall claims costs. For example, the repair facility wouldn't have to spend the time and resources writing and submitting supplements and waiting for approvals.”

Risley also predicted more technology involved in DRPs.

“I think we are going to see an increase in the amount of software applications that a shop is required to utilize to regularly communicate with the vehicle owner, rental car company, insurance company, CSI vendor, etc.,” he said. “We will probably also see an increase in the amount of training and OE certifications required to participate in a given DRP.”

This is why he also predicted that shops will increasingly focus on operating with just a few DRPs.

“I think that due to the increase in the requirements to participate in any given DRP and the amount of effort required to meet the performance-based measurements outlined by a given insurer, repairers will be forced to focus on a few,” he predicted.

Beryl Carlew’s consulting firm, Carlew & Associates, conducted a research project on DRPs in 2006, collecting data from 386 shop owners and operators that in total operate 700 shop locations in 20 markets with $1.7 billion in annual revenue.

Among the key things those shop operators wanted to see was that insurers:

• truly enforce their DRP criteria, by not including those who do not meet the program’s stated requirements;
• place a weighted priority on the key performance indicators (KPIs) by which shops are being critiqued, so that it is clear what is most important to the insurer;
• post program requirements and procedures on a website so that shops and local insurance staff all have the same understanding of how the program operates;
• ensure that shops have ongoing access to the same performance data that the insurer is using; and,
• create a clear dispute resolution process.

“The ability of an individual personality to influence my staying on or off a program with the millions of dollars at stake is just no longer acceptable,” Carlew said of the lack of a resolution process. “I think if we had the will we could do all of these things. But I think there’s dispute as to whether there’s a desire to take a risk to do something different.”

Carlew believes insurers are intent on referring more volume to fewer shops, which will force those shops to focus on performance more than ever.

“So I may no longer have $25,000 [in monthly sales from an insurer] at risk. I may have $300,000 at risk,” he said.

But he also believes insurers have the ability to help their DRP shops improve their performance by giving at least top performers some assurances of volume. This will allow repairers to plan adequately for staffing and hours to maximize use of their facility, improve cycle time, etc.

Lastly, Carlew’s research confirmed what has also been widely discussed within the industry: customer pay work is increasing at most shops.

“If customer pay was ranked like a DRP in terms of the mix of business at those shops in the research, which averaged $2.4 million in annual sales, customer pay would have been the fourth largest DRP at those facilities,” Carlew said.

Brian Sullivan, editor of the weekly Auto Insurance Report, does not believe more insurers will follow Allstate’s lead into ownership of collision repair facilities. Nor does Sullivan believe any one particular DRP model will become the norm.

Certainly five years from now, and maybe even ten, Sullivan believes, insurers will continue to use various models: larger networks with lots of capacity, smaller networks with stricter requirements, concierge- type programs, programs putting insurer personnel in shops.

“At this juncture there is no clear model that has emerged as ‘the answer,’” Sullivan said. “If I had to say what will happen in five years, my answer is that there will still be a range of solutions. Companies will be doing the things that work best for them and trying new ideas. I just don’t see on the horizon the big ‘aha’ that is going to swallow up the way we do business today.”

What may have more impact on DRPs will be various insurers’ market share, he said.

“There are a handful of insurers who are really, really good at this, and there are a whole bunch of insurers who are just sort of muddling along,” Sullivan said. “The people who are really good at it are going to take the customers away. You will continue to see market share flow to the bigger companies.”

(Indeed, the Top 10 auto insurers combined now have 63.5 percent of the market, up from 61 percent five years ago.)

Two other factors that Sullivan predicted may impact DRPs over the coming five to ten years will be a significant decline in the number of shop owners, although the number of actual shops may not decline as rapidly as more join the ranks of multi-shop ownership, and increased complexity of vehicles, which may give dealers more of an edge due to specialization.

While most have foreseen, at least in the short-term, a continued decline in the number of shops allowed to participate in any particular DRP, some also predicted that may change.

The increasing amount of available data and automated tools, for example, will enable insurers to more readily measure and track more shops, according to Dave Boden, a founder of ProcessClaims who joined CCC Information Services when it acquired ProcessClaims last year. He said one key to making that happen, however, is to make the automated tools out there offer value for the shop as well as for the insurer.

“Most of the tools were built for the insurer, to get them the estimates, to get them the data, and the shops were left to get their own tools and data,” Boden said. “If you’re going to expand these tools and have a much bigger network, you can’t just make tools that are just for the insurer. They have to be for the entire industry.”

Russ Thrall III, a former editor at ABRN and INSIGHT who now works for the I-CAR Education Foundation, agreed that within ten years, the current downsizing of DRP networks will reverse itself.

“Technology will make the benefits of limited referral arrangements largely obsolete,” Thrall said. “Over time, a common set of financial and non-financial performance measures will be used by a larger group of insurers and repair facilities. Tracking these measures and communicating electronically will increase productivity on both sides of the transaction. For an insurer, why limit that increased efficiency to just a small number of DRP facilities?”

Mike Condon agreed that allowing non-DRP shops to use some of the electronic communication tools being used within the programs makes good sense.

“Why can’t the benefits of technology we’ve accrued over the years be extended to all?” asked Condon, a former All-state executive turned industry consultant. “Why is an assignment a requirement for e-commerce? Why does DRP membership really require referrals? Why can’t we just have trading arrangements, and part of that membership is a subset who get referrals? We could just have different levels of DRP membership.”

Condon said opening up electronic communication to non-DRP shops will enable insurers to compile data on shops outside their network, creating in effect a “farm team” of potential shops should the insurer’s capacity needs change.

“If we had electronic communication between DRP and non-DRP shops, there also would be data from which shops could market themselves as well,” Condon said.

Condon said insurers are certainly watching to see how successful State Farm is at rolling out significant changes to its direct repair program. Some are concerned that State Farm’s emphasis on pricing as such a key element of its program might serve as an impetus for regulations limiting DRPs, which, as Condon points out, would affect not only shops and insurers but entire other segments of the industry created or at least fueled in large part by the growth of DRPs.

“Think about if one or two meaningful states had some regulation where there was no DRP. Think about how it would impact every industry segment,” Condon said.

Insurer customer referral programs would not likely go away under that scenario, he said. They would more likely just return to the pre-DRP days, when they were run informally at a local level, which was also far from ideal.

“All industry segments, or certainly most, have a vested interest in the continued evolution and improvement of the referral program model,” Condon said.

Without that continued evolution, Condon said, the industry is faced with the significant consequences of DRPs ending or being stuck with the imperfect and perhaps unsustainable status quo. It reminded Condon of a quote from Woody Allen:

“More than any time in history, mankind faces a crossroads,” Allen observed. “One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to choose correctly.”   o

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