Much as insurance companies have been endeavoring to defeat initiatives at the state level that restrict their use of credit scoring in underwriting, they are also facing opposition in the auto claims arena.
The opposition comes in two primary forms: anti-steering legislation aimed at preventing insurers from operating direct repair programs (DRPs), and laws mandating the use of original equipment manufacturer (OEM) auto parts in repairs.
Last week at the National Association of Mutual Insurance Companies (NAMIC) Annual Convention in San Diego, University of Arkansas Associate Professor and Whitbeck-Beyer Chair of Insurance and Financial Services Lawrence Powell discussed the findings of a paper he authored on the subject. The study, Consumer Choice in Auto Repair: The Politics and Economics of Automobile Insurance Repair Practices, was coauthored with Kathleen McCullough, Patrick Maroney and Cassandra Cole, all professors at Florida State University.
“Insurers’ use of DRPs and aftermarket cosmetic crash parts has come under attack in state legislatures and courts by groups whose economic interests are threatened by these practices,” the paper states. “These groups—which consist of primarily on non-DRP shops and manufacturers of OEM parts—contend that insurers use of DRPs and aftermarket parts forces consumers to accept shoddy repairs performed by substandard shops using inferior replacement parts. These claims do not withstand scrutiny.”
At a press briefing discussing the paper, Powell enumerated the benefits consumers derive from DRPs. One obvious efficiency is that DRPs eliminate the likelihood that a body shop will inflate estimates in order to help a consumer “bury” the deductible. “The vertical nature of the relationship can reduce fraud,” Powell said.
Moreover, when using a DRP facility, consumers are likely to receive faster repairs, he said, because DRP members often have the authority to begin repairs for the insurer without the need to wait for approval from adjusters or claims representatives. This expedited process has ancillary benefits as the reduced time renting a car shaves an estimated 10% to 15% off the average claim, Powell noted.
Powell also noted that anti-steering laws may be challenged on legal grounds, citing the Supreme Court decision that the first amendment’s free speech clause applied to both commercial speech, as well political speech. “The Court has predicated the protection of commercial speech on the proposition that such speech is valuable to society to the extent that it disseminates knowledge, which is to say truthful,” the paper states. “This suggests that when considering the constitutionality of so-called “anti-steering” laws that restrict the ability of insurers to communicate with policyholders about DRP shops and the benefits of having one’s vehicle repaired at such shops, the crucial question is whether the communication is false or deceptive. If it is not, the presumption ought to be that it is protected under the first amendment.”
A similar consumer-centric logic can be wielded to defend the use of aftermarket auto parts. The paper argues that by decreasing the cost of collision repairs, after market parts reduce the overall cost of auto insurance, and in turn, premiums. Powell noted that when aftermarket auto parts began to enter the market in the 1980s, the price of OEM parts fell precipitously in response to the competition. For example, an OEM replacement fender for a 1992 Toyota Camry cost $253. After aftermarket manufacturers began offering the part in 1993, the OEM price dropped to $202. By 1996, the aftermarket price was down to $60. The authors contend that eliminating aftermarket parts from the market would increase the cost of insured losses by 35% or $14.08 billion per year.
“Everyone from Milton Freidman to Paul Krugman agrees that competition is a good thing,” Powell said.
Proponents of aftermarket parts note that to address one the most contentious issues surrounding their use, quality, the Certified Automotive Parts Association (CAPA) was formed to scrutinize and certify non-OEM parts for use in the repair industry.
Another issue clouding the use of aftermarket parts is that of patent law. With OEMs increasingly filing patents for individual parts, federal legislation has been introduced that would clarify which parts are eligible for patent protection. “The impetus for the Access to Parts Act is the fact that original equipment manufacturers have in recent years obtained patents from the U.S. Office of Patents and Trademarks on some individual crash parts,” the report states.
With 6% of drivers submitting claims for comprehensive and collision damage to their vehicle each year and lawmakers in statehouses around the country considering these issues, the insurance industry needs to stay engaged, Powell concluded.
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