Within most agencies and insurance companies, claims servicing ranks near the bottom of the organizational hierarchy. Why?
One reason: Claims don't bring in revenue. For agencies, the primary source of revenue is commission on premium sales. For insurance companies, it's the return on invested premium dollars.
Here's another reason: Most resource dollars have already been spent for account acquisition and policy management-making claims organizations suffer in a number of ways (for instance, inferior automated systems and nonprofessional staff). This situation has created a cycle of low performance, with consumers ultimately bearing the cost and aggravation of an ineffective business model.
CASE HISTORY
Let's examine the process for handling Auto Physical Damage claims as it might happen today. Here's the experience of someone we'll call Joe:
Joe bought his Auto insurance from Midwest Insurance through the Middletown Agency, whose principal is Joe's lifelong friend. Last month, Joe was in an accident that damaged the right rear side of his new Mercedes. He called Midwest, who took the accident report and called a tow truck, which took the car to ABC Body Shop. Midwest then referred the claim to the Middletown Agency.
When Joe called the agency to inquire about ABC, he was referred to Sally, who handles claims. Sally said that Middletown would never recommend ABC and that he should take the car to Prime Auto Body or Top Notch Auto Body-the agency's usual recommendations. Joe had the car towed to Prime. ABC told him that they would send him a bill for an appraisal, which they were authorized to perform based on the tow job order.
Prime performed its own appraisal, which was sent to Midwest and Middletown. Midwest then informed Middletown that Joe had to use ABC (because its appraisal was lower) or that Prime had to match ABC's price (which was based on after-market parts). Prime refused to lower its appraisal, which was based on OEM parts. After three weeks, Midwest agreed that Joe could have the car repaired at the body shop of his choice, but insisted that he accept after-market parts.
Joe refused. He called his old friend Bob at Middletown Agency and asked for help. Bob was unable to resolve the issue with Midwest. After a heated discussion, Joe decided to have the car repaired at Prime and pay the difference between the Prime and the ABC estimates.
Repairs were finished in six weeks, but when he picked up the car, Joe noticed that it didn't handle properly. An inspection by the Mercedes dealer revealed that damage to the wheel assembly had never been repaired. Joe returned the car to Prime, who began renegotiations with Midwest. After four weeks, Prime was able to complete the repairs.
What was the final result of the claims experience? As a result of this claim, not only did Joe have to pay $2,800 to get OEM parts, but the time he devoted to solving the problem came to $3,500 in lost earnings. (As a corporate tax accountant, Joe's time is billed at about $350 per hour.) His irritation was immeasurable. Midwest Insurance and the Middletown agency lost a good client. And Bob nearly lost a friend.
While Joe's example may seem exaggerated, it does happen and it illustrates how flawed the system is. But there's a better way. It's called 'managed auto care,' and a number of companies provide it to insurance companies and self-insured fleets.
MANAGED AUTO CARE
To understand managed auto care, let's examine how one company, First Priority Group (FPG), of Plainview, NY, handles its managed auto care program. For the past 16 years, First Priority Group has been providing managed auto care services to self-insured fleets for Fortune 500 companies. Under the FPG service model, a driver in an accident simply calls FPG's 800 number, where the report is taken and all service arrangements are made.
Services include towing, door-to-door pickup and delivery of the rental car, appraisals, scheduling, repairs, a lifetime warranty on the repairs, and enrollment in the company's Driver Shield™ program: a package of services valued at about $400.
FPG has developed a network of more than 2,400 body shops that are certified and under contract to perform repairs according to strict industry standards. FPG routinely performs quality audits with customers and unannounced on-site inspections of the shops. Any shops not meeting the company's performance guidelines are dropped from the network.
The company is able to improve quality and reduce claims costs in several ways. The company electronically accesses digital photos and appraisals of auto damage directly from the body shops. FPG then validates the appraisals using industry-standard appraisal- and repair-estimating software. Discrepancies are resolved on the spot. The repair is scheduled, and all service arrangements are made for the insured. Once the repair is completed, inspections are performed to ensure quality. Payment is made to FPG, which then pays the body shop after deducting a small processing fee.
FPG's organization includes a special subrogation and salvage division, which ensures capture of all available claims dollars. The company's tight estimating and quality-control process results in repair cost reductions of 10% to 30% (compared against industry averages). In addition, the repair cycle is significantly reduced, thus saving rental fees and reducing customer inconvenience. For self-insured fleets, there's no insurance company involvement throughout this service cycle.
Does FPG achieve the same results working with insurance companies? Yes, but it takes the insured's cooperation. In most states, insurance companies are not permitted to require use of a particular shop. That choice is left to the insured. Consequently, FPG must convince the insured to use one of its shops. This happens about 30% of the time, and when it does, results are the same as for self-insured fleets.
The auto managed care program with insurance companies is called 'Direct Repair Program' (DRP). The benefits for insureds under DRP are the same as they are for self-insured fleets. The benefits for agencies and insurance companies are that DRP can effectively improve customer service while reducing channel costs associated with auto claims. Insurance companies derive savings from reductions in two interrelated areas:
processing costs and settlement costs. The latter is the more important component.
IMPACT OF DRP ON CARRIERS' CLAIM COSTS
In insurance companies, average total premium and earned investment income is intended to cover policy-acquisition costs, premium taxes, general overhead, reinsurance costs, allocated and unallocated loss adjustment expenses, and claims settlement costs and profit.
According to studies published by McKinsey and Co., the greatest potential for savings within this cost mix is in the reduction of claims leakage, which is caused in part by inadequate quantity and quality of staff, improper supervision, delays in handling claims, and improper investigations.
Claims workload within insurance companies is comprised of 'arisings' (new claims) and 'pendings' (claims being processed). The unallocated loss adjustment expense just referred to is essentially staff cost, which is a function of pending claims. Adjusters 'hug' these pendings, since they know they'll lose their jobs when the pendings go away-which means that there's an inherent disincentive to resolving claims quickly. Thus the arising/pending ratio hovers at around 3:1 to 5:1 in most companies. This is perpetuated in large insurance organizations that still value staff size over real productivity, and continue to reward inefficiencies by default of outdated strategies and policies.
Progressive, by comparison, uses a modified DRP model and maintains an arising-pending ratio of 1:1, the best in the industry. Progressive also betters its peers on loss adjustment expense by 1 or 2 points and loss ratio by 5 to 10 points.
Using DRP, insurance agencies derive savings because the amount of time required to manage their auto claims-from first report through closing-is reduced. How much time you can save or put to other uses depends on your agency's auto-claim volume and how much of the claim is handled by your agency, as opposed to the insurance carrier.
Most important, however, is the improvement in your customer service, derived by involving the services of experts in managed auto care. And your agency is not on the hook for making shop referrals to its clients. The clients still make the final choice of which shop to use.
SOME CAVEATS
Many agencies have a relationship with one or two shops and promote them heavily. Therefore, one of the caveats to using DRP is that your agency may have to give up the benefits it used to get when your clients were referred to these preferred body shops.
In addition, some insurance carriers maintain informal, preferential relationships with certain body shops. Although these shops may indeed be better than others, as shown in Joe's story, it's not the same as using a shop within a managed care network.
Regardless of these prior relationships, all concerned parties should consider the managed auto care model. After all, no agency would want their clients to suffer Joe's experience.