Jan. 1, 2020
Whether you like them or not, DRPs are here to stay and shop owners need to understand the positive aspects and drawbacks of these arrangements in order to make informed decisions.
There probably is no other topic today that will polarize members of our repair industry more than direct repair programs (DRPs). Many feel they are illegal, evil or even a secret conspiracy aimed at the demise of the collision repair industry. Others view them as a viable, steady source of business that they couldn't live without.

Regardless of your viewpoint on this topic, the purpose of this article is to look at the basic pros and cons of DRPs. To do this we need to look at the views of the three main parties that are usually involved in the claims and repair process when an accident occurs: the insurer, the repairer and the vehicle owner. We also need to explore the reasons why DRPs have become essential for insurers, why customers have generally accepted this process, and why shops frequently want to get on a program at almost all costs.

Upside for insurers

The first party to look at is insurers and what exactly the DRP advantages are for them. Cost containment comes to mind immediately as the most logical advantage, even though most insurers will downplay this benefit at the corporate level. However, no matter how hard they try to downplay this area, it simply is a fact that establishing a partnering agreement with repairers to do much of the administrative work and for a discounted price reduces their costs.

Typically insurer costs are looked at in two basic categories: direct costs of repairs and loss adjustment expense (LAE). Their LAE includes their administrative costs for each claim and can factor in their allocated overhead costs, too. These two categories of costs together are referred to often as their "combined ratio." In the past, companies like State Farm may have reported a combined ratio of over 100 percent. This means for every premium dollar received State Farm would ultimately pay out more than that dollar. It doesn't take a top CPA to realize this is a dangerous position to be in. There is no doubt the repair industry would not be successful with this concept, and probably within a year the doors would be locked by someone permanently.

I have not reviewed the combined ratio figures for the major insurers for a few years now, but my assumption is they no longer exceed 100 percent. It has been reported that insurers such as Progressive have combined ratios in the 80 percent ranges. How are they doing this? Cost containment (LAE). A portion of these costs is often passed on to the shops that do much of the administrative work for them as a result of DRP agreements, many times at no cost as a value-added benefit of the agreement. A perfect example is the total loss assessments and storage costs in many DRP agreements today, as well as doing the initial estimate at the shop, rather than the overhead created with drive-in claims centers of the past.

There are also pricing concessions that require discounts in many areas of the repair costs. This can include parts discounts, reduced labor rates and reduced or no markups on sublets and/or towing. And, in many agreements there are penalties for missed target dates and other administrative errors. The combined effect is cost containment/reduction.

Another benefit to insurers is reduction of staffing required to manage the shops on their programs. State Farm, through its national awareness presentations since NACE 2005, reported that total Select Service (Version 1) and Service First Shops hovered at around 18,900. Their initial vision was to get in the mid-9,000s. This will certainly allow for a significant reduction of their direct human resource needs in management of their new Select Service Program. Coupled with some new technology tools, this will become a very significant benefit to insurers.

There also is no doubt the speed with which the vehicle goes through the claims process is a major benefit, too. The complete cycle time from date of loss (DOL) to file closed has improved dramatically with DRPs. This is not only a benefit to insurers, but shops are paid quicker (via electronic transfers) and vehicles are returned to their satisfied owners quicker.

Insurers go through cycles within their own industry too, and right now profits from the collision side of their business have never been stronger. We are seeing frequency of claims dropping for many reasons that directly impact their payouts and profits. Insurers are all in competition with each other, so we can expect to see insurers reducing premium rates to attract more market share. And they will likely use various underwriting approaches to keep good policyholders.

Since auto insurance is basically a commodity in the eyes of most vehicle owners, price is one of the only tools insurers have to attract new policyholders. Even with the billions of dollars spent on marketing and advertising, the bottom line for getting a new policyholder may be a $10-difference in annual policy prices, and/or the experience they had if they filed a claim.

For many insurers not among the top 25 to 50, it's rather difficult to compete, so consolidation will be necessary for these players to survive and they will need to find extremely cost-effective ways of handling claims.

Downside for insurers

The cons of direct repair programs to insurance companies primarily revolve around consistency. Their objective is to have self-management systems within the repair industry to get consistent results, but we are a long way from this goal. Even today, most in the industry struggle with quality assurance and the elements necessary to achieve consistent results.

They also know the experience customers have during the claims/repair process may dramatically affect policy renewal. The best time to retain or gain a policyholder is right after an accident, since, statistically, they will not have another claim within the next seven years. Therefore, losing a customer due to a bad claims/repair experience is unacceptable, and this is one of the driving forces behind their DRP models. They want shops that can provide quality service, which helps during that retention process.

Upside for repairers

Repairers believe DRPs provide them with a larger, consistent volume of work, enough to offset any discounting they may accept to obtain the relationship. Many believe discounting equates to a reduction of quality or service. This concept is simply ridiculous, in my view. I am not saying this never occurs, but to consider this to be an absolute truth is a demonstration of the serious lack of business and economic understanding by many members of our industry. The position of, "If I can't do it or understand how it can be done, then it has to be bad," can't be a smart stance.

This mindset is not limited to today. In the late 1800s, the Patent Office General wrote a memo to the President and Congress that the Patent Office will no longer need to exist because, "All that needs to be invented has already been invented." Every day someone figures a better way of doing something that yesterday was not thought possible. I have written several articles over the years in regards to better process management and facility design, using better technology and changing the way we do business. Some are figuring this out while others argue "foul."

It is true that the increased volume of dollars can allow for a larger enterprise to be created that can reduce internal costs or their distribution over greater gross profit dollars. Larger enterprises can buy better and afford to implement changes. This concept is hard for smaller operators to understand, and they feel threatened by it. This is one reason such polarizing views exist.

One factual trend is that the volume of claims dollars per shop each year is realigning and quickly moving toward the 80-20 rule — 80 percent of the claim dollars will be repaired by 20 percent of the shops. We are not quite there yet, but I have seen figures and recently heard speakers say we have reached upward of 70 percent. This will certainly increase with the demands to keep DRPs, and because of the need for new specialized training and advancements in equipment. As shops continue to learn how to improve their processes and better utilize technology, they will be able to take a bigger portion of the available volume.

A shop owner from the Southwest recently told me, "I have been able to grow my business each year to sales levels that I didn't think we could have achieved since targeting three DRP programs in my area. We were always one of the market leaders, but the extra boost in sales has allowed us to do things I didn't think possible. You have to look deeper than the percentages to the actual dollars we have to run our business."

Downside for repairers

So what are the cons of having DRPs if you are a shop operator? First, what have you given up? Were the concessions based on a strategy or anticipated volume level? Did you just believe your overseer of the program when they said, "This is what we expect, because everyone else on the program here does this." From experience this is one of the greatest fallacies of DRPs. Everyone seems to be setting their prices and rates based on information that cannot legally be verified, rather than a plausible business strategy. Are you able to maintain proper profit levels with the concessions you've made? And agreeing to part discounts, reduced markups, as well as lower labor rates are only the tip of the iceberg.

What about items you perform that you provide as a value-added benefit, such as total loss assessment, vehicle cleanup for delivery, pickup and delivery, seam sealers, corrosion protection, door bonding kits and even hazardous waste disposal? These are but a few of the items you may have agreed to perform at no charge, but you must realize the costs involved.

In many cases, the program overseer controls the repair times. This may not seem problematic for shops that pay technicians on flat rates because the gross profit percentage does not change whether that repair has 6.0 units of labor or 8.0. But to the technician it is a problem, and your overall profits suffer based on the time in production.

Another concern for DRP shops is that the rules change more often than the weather. In Indiana where I live, this can be daily or hourly. As I stated earlier, consistency is a goal of the insurers, but they seem to do everything at the field level to deter this from happening. I have witnessed many scenarios where one re-inspector tells the estimator and technician to perform the repair in a certain manner. The next day another re-inspector (the last one's boss) comes in and changes the method — after the shop has begun the former method. This loss of control is often considered a critical con of DRPs. A shop owner in Indiana I spoke with stated, "I cannot serve two masters, so I choose to serve the vehicle owner." In addition, increased administrative responsibilities related to DRP documentation have increased overhead costs significantly.

Shops that do not have DRPs often view such arrangements as a global con, due to what appears as a loss of volume. This often depends on their business model and the demographics of their market area. Smaller shops below $1 million in sales can exist in smaller markets by "owning the customer." This takes an increased emphasis on getting the sale by educating the customer as to their rights and the shop's willingness to work only for the vehicle owner.

Many who have had DRPs for several years have forgotten how to market and improve their sales performance. If they do lose a major DRP, they may not be able to recover, so there is always a risk involved in building the business on DRPs alone. I have mentioned in seminars for years, we have grown lazy in closing sales and taking the proper long-term approach for the business. It has been so easy to wait by the fax or computer for assignments, but that's very dangerous when claims are down. When claims are up we then become too busy with administrative paperwork duties. This then can be considered a basic con of DRPs — there currently are no volume guarantees.

Most highly-reliant DRP shops have at times forgotten about the foundation of keeping their business strong — the basic marketing and sales process. How much is spent today on customer direct marketing and sales training with those that rely on DRP relationships? Very little. Is this often due to the fact that concessions provided in the agreement simply leaves very little to do so?

Downside for vehicle owners

Now to the vehicle owner cons. Other than a perceived sense of a lack of choice, there may not be many disadvantages to them. Even though there are cases where the claims personnel may breech the in-dividual state's definition of anti-steering, the customer is not legally required in the vast majority of policies to go to a preferred provider. In many states, they don't even have a definition or law addressing steering or trade restriction.

It certainly would be good if in each state where DRPs are allowed by freedom of choice of the vehicle owner, or even if a tiered policy is allowed to specifically stipulate an "in network" provider, criteria is established that outlines what is required to operate a collision repair facility — and it is enforced. This can be a critical con for the vehicle owner if the repairs are being performed by shops that are not able to repair the vehicle properly with the proper equipment, materials or training.

Upside for vehicle owners

Looking at this without emotion can be difficult. What can be more exciting and time well spent in the vehicle owner's mind than to be responsible for getting a vehicle repaired after an accident? Possibly a root canal? So if they can elect to have something they view as a hassle-free repair experience — enter concierge programs.

To a vehicle owner all they have to do is drop off their car at the insurance claims office, pick up a rental vehicle and only have to deal with the insurance company when they pick the vehicle up following repairs. I am sure if we were all really well-off financially, we would love to have someone we call who could take care of everything for us. Well, this is getting pretty close in the minds of the vehicle owner. If it was not valuable, I am sure the market share increases wouldn't be so obvious for Progressive and why other insurers are now so interested in refining their programs.

The hard thing to swallow is that the vehicle owner wants the least hassle and will not often take the more difficult route to getting their vehicle repaired. There are certainly exceptions with different areas within the country, the age of the vehicle owner and the vehicle they drive, but, for the most part, vehicle owners simply say, "Take care of something I don't want to." How can this be bad for the vehicle owner?

It is also in theory that through DRPs the cost containment realized by the insurers allows for the pricing of future insurance rates to the vehicle owner to be reduced as well. This will certainly drive more competition within the insurers to retain and increase policyholders. Consumers like to see the costs of services they must have reduced; so do elected officials.

I have tried to present some of the pros and cons of DRPs for the three main parties involved. Anything that deviates from focusing on the vehicle owner will lead any of the parties in the wrong direction. Many believe the vehicle owner has a right to choose — and they do. But is this just a right to choose them, or has the vehicle owner chosen when they buy their policies?.

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