Outsourcing DRP Management Gives Auto Insurers Advantages

To put this trend into context, it is helpful to consider the landscapes of the collision repair industry and the property and casualty insurance industry, and how they are influencing the adoption of DRPs. The collision repair industry is a $37 billion business in the United States and is highly fragmented. According to the Collision Repair Industry's Insight, 62 percent of the market share is held by independent repair facilities, followed by auto dealership repair facilities (23 percent), franchise/consolidation/production (9 percent), and paint facilities (6 percent). In all, roughly 40 to 50 thousand facilities provide collision repair services. Of these, approximately 15 to 18 thousand belong to managed DRPs from which they receive a significant portion of their work.

In the insurance industry, competing trends in claims are contributing to higher costs. On one hand, the auto-claim frequency rate has been steadily decreasing with a trend line of approximately -1 percent over the last 20 years. This can be attributed to advancements in vehicle and traffic safety measures. On the other hand, claim severity has grown approximately 5 percent per year over the period, according to the Insurance Research Council.

However, insurance companies that actively manage their direct repair programs have had success in reducing aggregate claim costs. Repairs that go through a well managed DRP, one that requires performance management of its providers, can realize a combined severity and loss adjustment expense of 5 to 10 percent per claim compared to the industry average, according to industry consultant Vincent Romans of the Romans Group.

The property and casualty industry now finds itself in an ambivalent situation. Despite a number of natural disasters, 2004 was a banner year for the industry in terms of underwriting profit performance, according to Romans. Third-quarter year-to-date results point to a number of favorable indicators, including a net profit of $26.7 billion, reflecting a 28.4 percent increase over the previous period, and a combined ratio of 97.9 percent, a 0.3 percent increase over the previous nine-month period.

The industry is notoriously cyclical, however, and these gains may not be sustainable. Market factors, specifically the combination of rising inflation and slower premium growth, may presage declining profitability as soon as this year. Such a scenario would put pressure on the insurance industry to find ways to cut costs and streamline efficiency related to operations and the claim process, Romans noted.

Values of Outsourcing

One element of a successful DRP is its ability to provide a network of collision repair facilities, offering high customer satisfaction, short repair cycle times, and reasonable repair costs. Many insurers who try to manage their DRPs in-house face a lack of market presence with the repair industry. Their claim volumes are too small or too geographically diverse to build effective relationships with individual repair facilities. Outsourced DRP management aggregates the claim repair volume from multiple insurers, creating benefits of scale.

In addition to the advantages of increased market presence, outsourcing DRP management provides instant access to new technology that can streamline the dispatching of assignments, estimate and digital picture retrieval, estimate compliance auditing, and information on program performance management.

Rather than enduring the difficult and resource-consuming process of establishing a DRP in-house, using an outsourced DRP allows for easy adoption of an existing process. Outsourcing DRP management allows a move into new markets without investing in facilities or staff. Furthermore, outsourcing DRP management takes a significant part of the claim work off insurance adjusters' desks, freeing them to perform more risk-reducing activities.

Insurers may choose to outsource all or part of their automotive claim management processes. Outsourcing does not have to be all or nothing. It is possible to take stepped approaches that complement insurers' individual situations and needs. A customized program can include first notices of loss, towing, glass, auto physical damage repair management, total loss settlement, salvage disposal services, and mobile electronic claim-handling packages. Outsourced repair management programs should be designed to be flexible.

As the demand for outsourcing DRP management continues to build momentum, new providers are entering or expanding into the market. With that in mind, it is important for insurers to do their homework, as not all programs are created equal. Prior to selecting an outside service, insurers should be knowledgeable about the different types of revenue models that exist and how these might match their management philosophies. Some programs are funded strictly through insurer-paid transactions, while others share the costs with participating repair facilities.

When evaluating managed DRP solutions, factors to consider include the integrity of the program provider, the experience of its management staff, compliance with state-to-state regulations, the quality of its repair network, and the breadth of its services. Insurers also should vet technology and software integration, accessibility to policyholders and claim departments, average repair-cycle time, network coverage, and flexibility. In addition, processes to ensure quality repair should be in place, such as audits, re-inspections, and warranties. Finally, there must be a measurable ability to control costs, severity, and LAE, while maintaining customer satisfaction.

Although customer satisfaction is last on the list, it certainly is not least. Recently, PPG Industries, a manufacturer of transportation and construction products, conducted research to discover what is important to vehicle owners during the repair process and what owners are looking for when determining where to have their vehicles serviced. The results indicated that a repair facility's ability to differentiate itself from others was not based solely on the quality of the repair, but rather on the quality of the entire repair experience.

Consumers pointed to two determining factors: the estimation process, which includes the description of work, a considerate appointment process, courtesy, and the estimator's knowledge; and customer orientation, such as providing answers, fulfilling commitments, and generally keeping them informed.

The research also revealed some similarities in the desired outcomes for vehicle owners and insurers. According to the study, vehicle owners want restored confidence, third-party verification of quality standards, guarantees on repairs, and identifiable branded networks. For their part, insurers want third-party verification of quality standards, ongoing audits, national networks, guarantees on repairs, high customer satisfaction, and fast cycle times.

Achieving the best claim outcome demands that insurers have an understanding of both their operational and business goals. A recommended first step is to conduct an analysis that identifies areas of opportunities and serves as the basis for the design and integration of the program. Insurers that commit to this process with their outsourcing partners can realize demonstrable results, including reduced severity, reduced rental payments, reduced IA costs, increased claim-handling capacity, improved staff utilization and retention, and greater customer satisfaction.

The benefits of controlling severity, reducing internal costs, and improving policyholder satisfaction are obvious, but many additional benefits to outsourcing DRP management may not be readily measurable. Imagine reducing hours of tedious paperwork and phone calls from your staff's days by eliminating the headaches of day-to-day management of repair facilities, warranty issues, multiple vendor management, and payment of individual service providers. By some estimates, it costs approximately $20 to $25 for an insurance company to issue a check. Consider all the other saving opportunities provided by more efficient processes, multiply that by thousands of claims, and it is easy to see how savings can be magnified by having a more efficiently managed DRP program.

Today's dynamic environment is making it necessary for insurers to be more aggressive in creating and implementing change as a means of increasing their competitive advantages. In such a setting, outsourcing DRP management can result in the best of all worlds for insurers: increased efficiencies, lower costs, and, of course, satisfied policyholders.

William Marshall is vice president of auto physical damage for Lynx Services, a division of PPG Industries.