Claims involving only the breakage of vehicle glass, without corresponding collision damage, have long been considered a nuisance in claim operations for many major insurance carriers. Because auto glass-only claims represent a small fraction of total auto severity, carriers tend to believe that they can easily outsource these claims in order to focus on the higher dollar cases, such as total loss and auto/medical claims. Claim managers tolerate the relatively high ratio between the loss adjustment expenses (LAE) and the severity of these claims because the overall costs appear to coincide with the amount that can be reasonably expected.

As a result of accepting these terms without thoroughly examining the glass repair process itself, many claim professionals possess a limited understanding of how far the effects of these decisions reach when establishing a glass program. The result is that insurance organizations are often unable to find new efficiencies and thus improve the overall performance of glass claim operations.

Outsourcing Strategies

Historically, such a strategy has been beneficial. Many insurance carriers, however, are discovering the negative side effects of outsourcing glass claims to third party administrators (TPAs). In recent years, carriers have begun to focus on how claim service and settlement impact customer loyalty — a leading indicator of insurance profitability. As claim operations have been optimized to improve customer satisfaction, difficulties in managing and measuring the outsourced model have become apparent. In addition, as carriers move toward greater automation and reduced personnel, glass claims must either be managed separately or be incorporated into the overall claim operation.

The aggregation of glass claims by TPAs has led to some very specific concerns in the marketplace. Foremost, smaller glass retailers regularly assert that illegal steering practices run rampant in the TPA realm. While these accusations are typically without proven merit, the resultant friction has led to legal action by independent glass providers; retaliatory pricing practices; and an unprecedented level of mistrust between vendors and insurance companies.

Another effect of the steering allegation is that unethical providers may feel compelled to commit fraud in a retaliatory effort to level the playing field. Recent legal action against retailers in both California and New York demonstrate that fraud can rise to extreme levels before being detected and prosecuted. Clearly, there is never justification for insurance fraud at any level. Even so, research suggests that vendors who perceive that they are forced to operate in an unfair environment are more likely to justify their potentially criminal activities.

Many glass providers also maintain that TPAs have some incentive to delay payment to vendors. Their logic is that TPAs would defer payments to manage cash flow and collect interest on unpaid amounts, as would many businesses. This practice is typically contrary to the desire of insurance companies, which strive to reduce a claim's cycle time by issuing payment as rapidly as possible. It is not uncommon for service providers to express concern about the simplest of claims, sometimes requiring weeks or even months for reimbursement, thus impacting cash flow and increasing friction. While service level agreements are sometimes put in place to prevent this practice, this element is often overlooked when negotiating agreements with TPAs. Conversely, carriers who ensure prompt payment after the glass claim has been audited find that many vendors are willing to compete for their business.

Even the most ethical of service providers have a credible complaint when working with TPAs that also have retail operations. Very few businesses would gladly share volume and pricing information with their competitors, and even the best efforts to ensure separation between TPA and retail activities cannot entirely dispel the fear that vendors are facilitating a competitor's business.

Zone-Based Pricing Pitfalls

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

Zone-based pricing, which is established via Metropolitan Statistical Area (MSA) information or other statistical data, is commonly implemented for both in- and out-of-network claims. This practice is prevalent enough that it has become an expectation of service providers and has led to significant negative side effects.

The first challenge to this pricing method is the underlying assumption that the cost of providing glass repair and replacement services varies significantly depending on the population density of a given area. Providers in rural areas typically receive higher payments than providers offering equivalent services in dense, urban zones. However, research indicates the reverse is almost invariably the case: Services administered in an urban setting generally 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 for more 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 often substantially lower than in urban areas. The MSA concept is primarily driven by the assumption that materials, especially glass, are substantially more costly in rural areas because of high distribution costs. However, this assumption is not based on analysis of distributor pricing practices. Distributors have sufficiently blanketed almost all rural areas to the point that most service providers can acquire glass and other supplies at identical rates to urban counterparts. Vendors in rural areas are being granted higher margins as a result.

The effects of the MSA zone have been damaging to all ethical parties involved with glass claims. Vendors are incentivized to create storefronts in rural areas to achieve the higher pricing offered by insurance carriers, enabling them to provide services at urban locations. Even ethical providers are driven to analyze zone patterns to establish the most profitable location at which to open a facility. They are effectively punished for having service locations that are most accessible to policyholders. In fact, the worst offenders do not even have a presence in these rural locations, which results in countless legal actions against these providers. It seems necessary for the industry to seriously contemplate whether the costs of enforcing the effects of zone-based pricing are worth any perceived benefits.

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

Another key element of the pricing process is the offer-and-acceptance (O&A) practice. It is interesting that carriers view this as an invitation to join a network, while glass service providers view it as a mandate or as price fixing. When communicating O&A terms to glass service providers, carriers must emphasize the positive benefits, such as improved referral standing, short payment processing time, and accelerated dispute resolution. Emphasizing these benefits can reduce tensions between the service provider and the carrier, thereby expanding the service footprint available for policyholders.

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

Indeed, the historical O&A model with a fixed percentage discount not only offers a “ceiling” on glass settlement costs, but it may also establish a “floor.” Service providers who would gladly accept an O&A at a more aggressive rate enjoy the additional margin afforded by the published willingness of a carrier to pay a higher rate. The bottom line is that fixed O&A terms are a sword that cuts both ways. Therefore, finding a better mechanism for determining a fair price is a goal that all parties should embrace.

Alternative Program Models

If a provider is to abandon zone-based pricing and the fixed O&A, then how can the market establish a fair pricing policy that provides excellent service to customers? The answer remains the same as it has throughout the years: Let the market be the arbiter of pricing, and let each regional market's competitive dynamic establish the price.

First, when establishing an O&A model, provide a baseline that is consistent across all areas. Eliminate the incentive for phantom locations or inefficient service areas. The pricing offered should be structured to achieve coverage for the vast majority of your policyholders. However, it needn't be so high that it achieves total coverage. Remain open-minded when receiving market feedback that may, in some cases, indicate that service cannot be provided in a particular region. Be prepared to either select an alternative O&A for the area or consider managing claims from that area on an exception basis if volume is negligible. Confirm that other vendors in the area are unwilling to accept the O&A, as many vendors do not receive O&A announcements and would gladly perform these services if they were aware of the opportunity.

Second, invite vendors to sharpen their pencils and improve their offers, making sure that the benefits of such improvements are clearly identified and honored. Improved offer programs have only begun to emerge in the last several years, and the results have been positive for all market participants. Vendors are less likely to feel that pricing has been imposed on them when they have in fact communicated their pricing to the carrier.

If you establish a program that includes an improved referral standing — either as a result of improved pricing or other preferential relationship — then balance the concentration of service between the most preferred providers and other quality participants in your network. This does not need to be a strict rotation; however, it does need to ensure that all accepting providers have some market access to guarantee that competitive participation continues to ultimately benefit the policyholder.

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

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

With friction between glass service providers and carriers as high as ever, it is time to evaluate how improvements in technology can be leveraged to achieve not only better pricing, but also better relationships. It is easy to measure the bottom line of total severity and average costs per claim; however, the task of assessing 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 above discussion is this: Keep in mind that glass claims are not highly complex transactions, and managing a glass program should not be, either. Industry data and technology enable carriers to gain greater control over this type of claim process. As a result, carriers may find themselves evaluating whether the method employed for glass claims should be applied to other policyholder claim experiences.

James Patterson is the director of glass product management at Mitchell International, Inc., a provider of information and workflow solutions for property and casualty insurers and collision repair facilities. He may be reached at james.patterson@mitchell.com.

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