The Past, Present, and Future of Referral and the Long-Term Impacts for a Repair Industry in Transistion…Part 2
Insurance company direct repair and referral programs are a widespread fact in today’s collision repair industry. Since the introduction of Allstate’s revamped DRP as their Priority Repair Option (PRO) referral program in 1988, insurance companies have embraced the benefits of direct repair programs as a method of claims handling that increases efficiency and improves customer satisfaction. Collision repair facilities, too, have increasingly participated in DRP plans. For many repairers, the addition of DRP volume to their mix of referral sources has allowed impressive growth rates, though often at the expense of overall profitability.
Though direct repair is here to stay in the collision repair industry, growth in DRP has not been free from controversy. Much of this controversy continues today.
Prior to the launch of DRP, most of a repair facility’s concerns with insurance company claims handling centered on the methods of paying for collision repair work on insured and claimant vehicles. With the launch of Allstate’s PRO shop program, however, considerable resistance regarding the future direction of shop-insurer relations emerged among repair facilities. This resistance was rooted in the traditional adversarial relationship that existed between shop and insurer. Also, many repair facilities believed that insurers were heavy-handed and unfair in their treatment of shops.
Today, this situation remains much the same for those in opposition to direct repair. Shop concerns include:
- Labor rate calculations and increases/discounts
- Materials rates
- Payment for non-included P-page procedures
- New, non-OE parts usage
- Insurer mandated discounts; and
- Insurer mandated sublet operations
These items, though hardly a complete list of friction areas between insurance companies and repair facilities, strike at the heart of repair facility profitability. The collision repair facilities profit, however, is the insurance company’s cost. This simple fact drives the nature of the relationship between shop and insurer.
Shops and insurers continue to negotiate around reimbursement rates for the work performed even though DRP volume has grown dramatically throughout the 1990s. No matter what form of claims handling process is used to settle the final bill, shops and insurers will still negotiate reimbursement rates and agreed upon procedures far into the future.
DRP’s advantage lies in its ability to reduce the cost of handling claims- not necessarily the claims themselves. By negotiating an agreed set of rates and procedures beforehand, shops and insurers can work from this agreed position to speed the handling and turnaround of individual claims.
For insurers, moving more claims to higher skilled, more efficient repair facilities helps lower overall costs and increases customer satisfaction.
As the chart on this page indicates, the advantages and disadvantages for shops and insurers are clearly defined. Beyond those mentioned above, insurers must be concerned about the potential for increased fraud by repair facilities that take advantage of the increased “trust” in the DRP relationship. Also, insurers must be concerned about the shop’s ability to satisfy their customer and represent the company to the insured in a professional manner.
These concerns are mirrored by shops that worry about the cost of concessions and the potential for the insurance company partner to dominate the relationship. Also, shops must rely on the insurer for a growing percentage of their repair volume. If the relationship turns sour, a greater portion of the shop’s business is at risk.
Pros and Cons
Benefits and Concerns Associated with DRP for both insurers and collision repair facilities
As the chart on this page indicates, overall DRP volume is estimated at roughly 20 percent of claims volume in 1999. This is a dramatic increase over the less than 5 percent volume recorded in 1990. Though a large increase, the growth was widely anticipated due to the expansion of DRP beyond Allstate and a few other insurers.
The addition of State Farm’s referral program, Service First, coupled with growth by Allstate are the two primary factors behind the overall growth of DRP claims volume during the 1990s. As reported last month, State Farm, the largest auto physical damage insurer in the U.S., runs approximately one third of their claims through Service First on a national basis. Allstate, the number two insurer, is believed to run similar percentages through their PRO program, with local percentages in the 40 percent range in some communities.
Given this pattern of growth, INSIGHT estimates that DRP volume will represent fully 50 percent of overall claims volume in the U.S. by 2005. This will create increasing competitive pressure on repairers in many metropolitan markets as consolidators and local, multi-shop operators seek to secure their position in the marketplace. This position must include a number of direct repair and referral programs to assure a strong competitive advantage and work volume.
While DRP is not necessary for independent repairers to succeed, those that do not participate find themselves facing tougher challenges every year. Eventually, many competent repair facilities will find themselves filling smaller niche roles in many markets as DRP volume continues to grow.