Insurers address new technology, parts legislation

Aug. 19, 2014
Parts and repair costs will remain a point of contention between insurers and shops, but carriers face challenges on other fronts as well.

Insurance companies, like collision repairers, have kept a close eye on the expanded use of technology in new vehicles, the aging of the vehicle fleet, the rising cost of repairs, and the overall decline in collisions.

"Repairing a vehicle today is increasingly like conducting a repair on a high-tech aircraft," says Robert Hartwig, president and economist at the Insurance Information Institute. "There are an enormous number of electronic components that can be damaged. The skill level needed at the body shops is increasing. The need for training is going to increase."

That means more upward pressure on repair costs as those vehicles become more sophisticated, and are built with new light-weight metals and composite materials. Shops will need to invest in order to keep up with these changes, and insurance companies are increasingly looking for the shops (and groups of shops) that can provide that level of skill at the best price. "Advancements in vehicle technology will require repairers to stay up-to-date on training and repair procedures," says State Farm spokesperson Dick Luedke. "Our goal is to work with repairers who continue to provide the best combination of quality, efficiency and competitive price as we deliver claim service to our customers."

In addition to repairability challenges, the continued aging of the vehicle fleet (the most recent data puts the average age of vehicles on the road at 11.4 years and still rising) will boost total losses. The good news is that collision-related deaths and injuries have generally declined over the past decade. "While the average age of vehicles on the road has risen, the level of safety technology in the average vehicle on the road has increased," Luedke says. "That has had the effect of reducing the frequency of crashes, which from State Farm's perspective is a good thing."

"In the longer run, a lot of these technologies are designed to avoid accidents altogether, or at least minimize impacts," Hartwig adds. "What it means for both insurers and automobile repair facilities is that there will be fewer accidents and fewer claims. Those that do occur will be expensive because of damaged electronics. That's what the future is going to look like."

According to Allstate Auto Claims Director Sam Whiteman, these new market realities should provide more opportunities for repairers and insurers to work together to make sure they fix vehicles cost effectively and profitably. "We should see less accidents, but with the newer materials and technology we should anticipate a higher cost per claim for losses involving these vehicles," Whiteman says. "Keep in mind this is still working through the market place. The repairer and the insurance company need to work together, today and tomorrow to serve their common customer.  I think those that work together will have an advantage (happier customer) over those that work separately."

With the number of collisions and repairable vehicles declining, the autobody industry has begun to shrink. The insurers interviewed for this article said that, in general, the continued consolidation of the collision industry has not materially changed the nature of the relationship between insurers, repairers, and drivers. The rise of large multi-shop operators (MSOs) has provided some administrative advantages, but insurers continue to focus on repair quality, cycle time, and pricing when working with shops.

"While there may be advantages for central points of contact, it boils down to execution at a shop and vehicle basis," Whiteman says.

Aftermarket parts debate continues
On the regulatory front, insurers and repairs have continued to clash over alleged steering practices and on the use of aftermarket parts.

The parts debate has gotten increasingly heated as OEMs have weighed in with lawsuits against aftermarket parts manufacturers, and State Farm launched its requirement for members of its DRP to use the PartsTrader online parts procurement solution.

According to Hartwig, the insurance industry sees this as a key cost containment lever in the face of rising repair costs. "Insurers have been working hard to contain these costs, using a variety of means," Hartwig says. "At the end of the day, insurers are trying to keep the cost of insurance affordable for consumers. They are giving people an option in what type of parts they want the vehicle repaired with."

Robert Passmore, senior director of personal lines policy at the Property Casualty Insurers Association of America (PCIAA), said that state level collision legislation over the past year focused primarily in two areas: salvage operations and parts.

On the salvage side, several states made changes to existing laws in the wake of Hurricane Sandy in order to reduce title washing. Colorado was a leader on that front, while states like Alabama, Florida, and Louisiana moved to halt the use of counterfeit airbags.

Bills in Maryland and Rhode Island, meanwhile, targeted the use of aftermarket repair parts, as well as the PartsTrader requirement. In Maryland, the Washington Metropolitan Auto Body Shop Association backed a parts bill that was voted down by the state's House Committee on Economic Matters. The bill would have prohibited insurer mandated parts procurement processes or specification of vendors, and limited the use of aftermarket parts during the first three years of the vehicle's operation.

Rhode Island's H-7404 bill sought to expand the existing 30-month ban on aftermarket replacement parts to apply to any motor vehicle body replacement part not made by the OEM. Another bill, H-7405, limited the use of used or remanufactured airbags or suspension parts. A third bill, H-7796, would have created different classes of body shops with different labor rates. All three bills were held over for further study.

"The Rhode Island parts bill ramps up restrictions in what is already one of the most restrictive environments for aftermarket pats use in the country," Passmore says. "Last year they passed a total loss bill, which restricted how insurers can determine if a vehicle is totaled. That regulation has been challenged in the courts, by us and other groups."

In Michigan, the state legislature was considering a bill that addressed steering, and would prohibit insurers from specifying aftermarket crash parts to replace the structural components of an automobile. It would also prohibit insurers from specifying aftermarket parts that were not certified by national testing boards, and would prevent carriers from specifying particular vendors to supply parts or materials.

Aftermarket parts were also under attack by the OEMs. In January, Chrysler filed suit against LKQ, claiming the company was making parts that infringed on ten of its patents. Ford has aggressively enforced its own patents, and last year the Autobody Parts Association (ABPA) filed suit against the automaker challenging its design patents. According to the ABPA complaint, by targeting the association's members, Ford has "improperly distorted the marketplace by decreasing the supply and increasing the cost of automotive body repair parts for Ford Motor Company automobiles.”

At the federal level, insurance groups and the aftermarket parts industry are attempting to address these challenges via the PARTS Act, a design patent reform bill. According to Passmore, there will likely be a hearing on the bill later this year.

"The push right now is to get some sort of legislative hearing and get that moved along," Passmore says. "There is momentum, and it has a good set of sponsors. The new concept reduces the enforcement period of a patent. The car company can still get the patent, but the enforcement period would be 30 months, not 14 years. That's enough time for quality aftermarket parts to be developed."

According to the insurance companies and associations, they will continue to push for the availability of non-OEM parts, particularly as the cost of parts increases.

"In an ideal world, policyholders would have the option of choosing what type of parts they want and what autobody shop they would like to conduct the repairs, and they want the insurers to stand behind the repairs," Hartwig says. "But they want options. It's difficult to argue against giving people options."

PartsTrader in the crosshairs
One of the biggest insurance stories of the past several years in the collision industry was State Farms requirement that DRP shops use the PartsTrader electronic parts procurement and bidding solution.

"We believe this program has helped us better serve our customers," State Farm's Dick Luedke said when asked about the program's impact.

Reviews from shops on the program have been mixed. After some initial bugs, some shops have been able to integrate the system seamlessly into their own processes; others have complained about the wait time and bidding period, and that the system duplicates functions that already existed in their shop management systems.

The Mississippi Collision Repair Association filed suit against State Farm and PartsTrader in 2013. Similar suits in Florida and Indiana followed. The Alliance of Automotive Service Providers of New Jersey (AASP/NJ) announced its support of the Mississippi lawsuit, and the Automotive Service Association (ASA) announced with would be working state associations to draft legislation related to parts procurement mandates.

Theoretically, competitive, online parts procurement solutions should produce savings and administrative efficiency, and a lot of shops already have this capability; State Farm's biggest misstep here may have been mandating a proprietary platform. A worst-case scenario for shops would be that other insurers follow suit, mandating different platforms for their DRP participants.

According to Passmore, the overall value of electronic parts procurement shouldn't be lost in the current fight over State Farm's specific mandate.

"The technology is improving to the point that companies can take the parts orders from whatever system you have and make it work with the claims system," Passmore says. "One of the big benefits is that the information passes smoothly from the shop to the insurer, and it can all happen on the back end electronically."

Ride share programs challenge insurance model
Another big issue facing the insurance industry, although it only peripherally affects repairers, is the emergence of ride sharing services like Uber and Lyft. These companies allow people to use their personal vehicles as quasi-taxis by connecting them with riders via mobile phone apps.

"The problem is that they are not commercial licensed, so they don't have taxi insurance," Passmore says. "There is an exclusion in most auto policies for livery or holding out for hire. That's a big problem if you get into an accident and don't have liability or auto coverage in that case."

There have been legislative fights across the country, with ride sharing companies squaring off against an otherwise unlikely alliance of insurers, personal injury lawyers, and consumer advocates. The California legislature was on the verge of passing a bill that imposed taxi-style regulation on ride sharing firms as of this writing.

"There are some bills taking a thoughtful approach," Passmore says. "Everyone agrees these vehicles need to be insured. Colorado passed a bill that lays out some bright line rules about having insurance to cover this in place before you can participate in one of these programs.

"If you rent out your car to someone else, that is something that is likely not covered on your policy," he continues. "You have to protect yourself. If you have a vehicle with a loan on it, you could wind up with a wrecked vehicle, no coverage, and a loan to repay."

And if one of these vehicles winds up in a repair shop, the shop could find itself stuck in the middle of an ugly claims dispute.

"There are new ways of applying technology (like smart phones, ride sharing, car sharing, etc.), and possibly more ideas on the horizon unknown at this time," Whiteman says. "How we apply technology and the impact on society needs to be thought through."

Insurance market still highly competitive
Hartwig says that while the collision industry has experienced a significant amount of consolidation, the property/casualty insurance market is unlikely to consolidate, given the high level of competition for customers and the number of regional carriers. Part of the reason: comprehensive auto claims are in the minority of losses paid out by the carriers.

"The majority of payouts are actually liability claims, which are related to damage you do to passengers in another vehicle, property of another individual, etc.," Hartwig says. "In most states there is a requirement to have insurance, but only to carry a minimum liability policy. More people have older cars, and in a lot of cases those owners have dropped collision and comprehensive coverage."

And while insurers are working diligently to reduce the cost of comprehensive claims—often putting them at odds with collision shops—they are working even harder in their efforts at cost-based policy pricing and risk assessment. That involves programs like usage-based insurance (i.e., Progressive's Snapshot program) and a lot of data crunching.

"Pricing has become more refined," Hartwig says. "The ability to slice and dice driver data will grow because computing power continues to increase and storage costs continue to decrease. In theory, there are now more risk categories today than there are drivers on the road. The real battle in the insurance industry is about underwriting acumen. Every insurer is working harder to get an edge in their ability to assess risk and price a policy appropriately. That creates a pricing system that is more fair and equitable, but most of that occurs behind the scenes."

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