Claims involving only the breakage of vehicle glass, withoutcorresponding collision damage, have long been considered anuisance in claim operations for many major insurance carriers.Because auto glass-only claims represent a small fraction of totalauto severity, carriers tend to believe that they can easilyoutsource these claims in order to focus on the higher dollarcases, such as total loss and auto/medical claims. Claim managerstolerate the relatively high ratio between the loss adjustmentexpenses (LAE) and the severity of these claims because the overallcosts appear to coincide with the amount that can be reasonablyexpected.

As a result of accepting these terms without thoroughlyexamining the glass repair process itself, many claim professionalspossess a limited understanding of how far the effects of thesedecisions reach when establishing a glass program. The result isthat insurance organizations are often unable to find newefficiencies and thus improve the overall performance of glassclaim operations.

Outsourcing Strategies

Historically, such a strategy has been beneficial. Manyinsurance carriers, however, are discovering the negative sideeffects of outsourcing glass claims to third party administrators(TPAs). In recent years, carriers have begun to focus on how claimservice and settlement impact customer loyalty — a leadingindicator of insurance profitability. As claim operations have beenoptimized to improve customer satisfaction, difficulties inmanaging and measuring the outsourced model have become apparent.In addition, as carriers move toward greater automation and reducedpersonnel, glass claims must either be managed separately or beincorporated into the overall claim operation.

The aggregation of glass claims by TPAs has led to some veryspecific concerns in the marketplace. Foremost, smaller glassretailers regularly assert that illegal steering practices runrampant in the TPA realm. While these accusations are typicallywithout proven merit, the resultant friction has led to legalaction by independent glass providers; retaliatory pricingpractices; and an unprecedented level of mistrust between vendorsand insurance companies.

Another effect of the steering allegation is that unethicalproviders may feel compelled to commit fraud in a retaliatoryeffort to level the playing field. Recent legal action againstretailers in both California and New York demonstrate that fraudcan rise to extreme levels before being detected and prosecuted.Clearly, there is never justification for insurance fraud at anylevel. Even so, research suggests that vendors who perceive thatthey are forced to operate in an unfair environment are more likelyto justify their potentially criminal activities.

Many glass providers also maintain that TPAs have some incentiveto delay payment to vendors. Their logic is that TPAs would deferpayments to manage cash flow and collect interest on unpaidamounts, as would many businesses. This practice is typicallycontrary to the desire of insurance companies, which strive toreduce a claim's cycle time by issuing payment as rapidly aspossible. It is not uncommon for service providers to expressconcern about the simplest of claims, sometimes requiring weeks oreven months for reimbursement, thus impacting cash flow andincreasing friction. While service level agreements are sometimesput in place to prevent this practice, this element is oftenoverlooked when negotiating agreements with TPAs. Conversely,carriers who ensure prompt payment after the glass claim has beenaudited find that many vendors are willing to compete for theirbusiness.

Even the most ethical of service providers have a crediblecomplaint when working with TPAs that also have retail operations.Very few businesses would gladly share volume and pricinginformation with their competitors, and even the best efforts toensure separation between TPA and retail activities cannot entirelydispel the fear that vendors are facilitating a competitor'sbusiness.

Zone-Based Pricing Pitfalls

A critical element of managing any claim settlement process isestablishing pricing for both in-network and out-of-network claims.The most common models today remain virtually unchanged over thelast decade. It is imperative that all glass claim professionalspossess an understanding of those models and their impacts in theindustry.

Zone-based pricing, which is established via MetropolitanStatistical Area (MSA) information or other statistical data, iscommonly implemented for both in- and out-of-network claims. Thispractice is prevalent enough that it has become an expectation ofservice providers and has led to significant negative sideeffects.

The first challenge to this pricing method is the underlyingassumption that the cost of providing glass repair and replacementservices varies significantly depending on the population densityof a given area. Providers in rural areas typically receive higherpayments than providers offering equivalent services in dense,urban zones. However, research indicates the reverse is almostinvariably the case: Services administered in an urban settinggenerally cost more than those in rural areas.

When examining a service provider's fundamental cost components,one must be aware of the three elements that generally account formore than 90 percent of glass service costs: overhead expenses(including rent and vehicles), labor, and supplies and materials.In rural regions, overhead and labor expenses are oftensubstantially lower than in urban areas. The MSA concept isprimarily driven by the assumption that materials, especiallyglass, are substantially more costly in rural areas because of highdistribution costs. However, this assumption is not based onanalysis of distributor pricing practices. Distributors havesufficiently blanketed almost all rural areas to the point thatmost service providers can acquire glass and other supplies atidentical rates to urban counterparts. Vendors in rural areas arebeing granted higher margins as a result.

The effects of the MSA zone have been damaging to all ethicalparties involved with glass claims. Vendors are incentivized tocreate storefronts in rural areas to achieve the higher pricingoffered by insurance carriers, enabling them to provide services aturban locations. Even ethical providers are driven to analyze zonepatterns to establish the most profitable location at which to opena facility. They are effectively punished for having servicelocations that are most accessible to policyholders. In fact, theworst offenders do not even have a presence in these rurallocations, which results in countless legal actions against theseproviders. It seems necessary for the industry to seriouslycontemplate whether the costs of enforcing the effects ofzone-based pricing are worth any perceived benefits.

All participants must realize that there are hundreds of marketsin North America. Even with the most rigorous zoning enforcement,reducing those markets to a few collective zones will introduceinefficiencies.

Another key element of the pricing process is theoffer-and-acceptance (O&A) practice. It is interesting thatcarriers view this as an invitation to join a network, while glassservice providers view it as a mandate or as price fixing. Whencommunicating O&A terms to glass service providers, carriersmust emphasize the positive benefits, such as improved referralstanding, short payment processing time, and accelerated disputeresolution. Emphasizing these benefits can reduce tensions betweenthe service provider and the carrier, thereby expanding the servicefootprint available for policyholders.

Establishing a pricing level for this type of practice is,without a doubt, one of the most critical decisions glass claimprofessionals address when managing their programs, as everypercentage point affects the bottom line in terms of severity. Ifthe established pricing is too aggressive, then friction betweenthe carrier and the vendor may rise to the point that it isdifficult to provide quality service to the policyholder. However,a level that is too low can enable profiteering at the expense ofthe carrier and, ultimately, the policyholder.

Indeed, the historical O&A model with a fixed percentagediscount not only offers a “ceiling” on glass settlement costs, butit may also establish a “floor.” Service providers who would gladlyaccept an O&A at a more aggressive rate enjoy the additionalmargin afforded by the published willingness of a carrier to pay ahigher rate. The bottom line is that fixed O&A terms are asword that cuts both ways. Therefore, finding a better mechanismfor determining a fair price is a goal that all parties shouldembrace.

Alternative Program Models

If a provider is to abandon zone-based pricing and the fixedO&A, then how can the market establish a fair pricing policythat provides excellent service to customers? The answer remainsthe same as it has throughout the years: Let the market be thearbiter of pricing, and let each regional market's competitivedynamic establish the price.

First, when establishing an O&A model, provide a baselinethat is consistent across all areas. Eliminate the incentive forphantom locations or inefficient service areas. The pricing offeredshould be structured to achieve coverage for the vast majority ofyour policyholders. However, it needn't be so high that it achievestotal coverage. Remain open-minded when receiving market feedbackthat may, in some cases, indicate that service cannot be providedin a particular region. Be prepared to either select an alternativeO&A for the area or consider managing claims from that area onan exception basis if volume is negligible. Confirm that othervendors in the area are unwilling to accept the O&A, as manyvendors do not receive O&A announcements and would gladlyperform these services if they were aware of the opportunity.

Second, invite vendors to sharpen their pencils and improvetheir offers, making sure that the benefits of such improvementsare clearly identified and honored. Improved offer programs haveonly begun to emerge in the last several years, and the resultshave been positive for all market participants. Vendors are lesslikely to feel that pricing has been imposed on them when they havein fact communicated their pricing to the carrier.

If you establish a program that includes an improved referralstanding — either as a result of improved pricing or otherpreferential relationship — then balance the concentration ofservice between the most preferred providers and other qualityparticipants in your network. This does not need to be a strictrotation; however, it does need to ensure that all acceptingproviders have some market access to guarantee that competitiveparticipation continues to ultimately benefit the policyholder.

Finally, don't fail to measure the performance of your serviceproviders. Create a scorecard mechanism that includes the vendors'availability for service, aggressive pricing, and policyholdersatisfaction. Establish a customer satisfaction metric, and weightit as heavily in the process as price and coverage.

Managing glass claims has become significantly more efficient astechnology has progressed over the last decade. Carriers now havemore choices and more tools available to them than ever before.Some carriers have already seized the opportunity to improve glassprogram performance, while others have continued to use traditionalmodels, having not fully evaluated all of the availableoptions.

With friction between glass service providers and carriers ashigh as ever, it is time to evaluate how improvements in technologycan be leveraged to achieve not only better pricing, but alsobetter relationships. It is easy to measure the bottom line oftotal severity and average costs per claim; however, the task ofassessing the indirect costs of legal action, retaliatory fraud,and insufficient coverage areas is more difficult.

One vital piece of information to take away from the abovediscussion is this: Keep in mind that glass claims are not highlycomplex transactions, and managing a glass program should not be,either. Industry data and technology enable carriers to gaingreater control over this type of claim process. As a result,carriers may find themselves evaluating whether the method employedfor glass claims should be applied to other policyholder claimexperiences.

James Patterson is the director of glass product managementat Mitchell International, Inc., a provider of information andworkflow solutions for property and casualty insurers and collisionrepair facilities. He may be reached [email protected].