Automobile Insurance Vehicle Repair Practices: Politics, Economics, and Consumer Interests

• DOI: http://doi.org/10.1111/rmir.12032
• Published date: 01 March 2015
• Date: 01 March 2015

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2015, Vol.18, No. 1, 101-128

DOI: 10.1111/rmir.12032

AUTOMOBILE INSURANCE VEHICLE REPAIR PRACTICES:

POLITICS,ECONOMICS,AND CONSUMER INTERESTS

Cassandra Cole

Patrick Maroney

Kathleen McCullough

Lawrence Powell

ABSTRACT

There is a continuing debate related to insurers’use of direct repair programs, in

which they contract with particular body shops to perform insured auto repairs

according to terms agreed to by the insurers and repair shop owners. A similar

debate exists related to insurers specifying the use of aftermarket crash parts

instead of original equipment manufacturer parts to replace damaged vehicle

components, such as door panels, fenders, and hoods. This study examines

these issues from a variety of perspectives providing initial evidence that if

properly used, these cost containment tools can be beneficial to consumers and

insurers.

INTRODUCTION

Each year, approximately 6 percent of drivers submit insurance claims for damage

to their vehicles (Insurance Information Institute, 2010a). For example, in 2009, U.S.

insurers incurred $41.2 billion in automobile physical damage losses.1A large portion

of this amount is paid to automobile collision repair facilities (hereafter “body shops”)

and automobile parts manufacturers.

Cassandra Cole, College of Business, Florida State University,821 Academic Way,Tallahassee, FL

32306; phone: 850-644-9283; e-mail: ccole@business.fsu.edu. Patrick Maroney, Professor Emer-

itus, College of Business, Florida State University, 821 Academic Way, Tallahassee, FL 32306;

phone: 850-645-8388; e-mail: pmaroney@business.fsu.edu. Kathleen McCullough, College of

Business, Florida State University, 821 Academic Way, Tallahassee, FL 32306; phone: 850-644-

8358; e-mail: kmccullough@business.fsu.edu. Lawrence Powell, Director, Alabama Center for

Insurance Information and Research, Culverhouse College of Commerce,University of Alabama,

Tuscaloosa, AL 35487; phone 205-348-3589; e-mail: lars.powell@cba.ua.edu.

1Authors’ calculations using NAIC InfoPro database. This database contains the statutory annual

statement accounting data that are filed with the NAIC by virtually all insurers in the United

States. These data are used with permission of the NAIC. The NAIC does not endorse any

analysis or conclusions based upon the use of its data.

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102 RISK MANAGEMENT AND INSURANCE REVIEW

In an effort to contain costs, some insurers have turned to the use of direct repair

programs (DRPs) and the use of parts that are not manufactured by the vehicle’s original

equipment manufacturer (OEM) or non-OEM parts. In a DRP, insurers identify and

contract with body shops that are able to perform high-quality repair work. In exchange

for referrals from the insurer, the body shop agrees to warrant repairs and provide

consistently measurable standards of service and quality for each repair. Aftermarket

or non-OEM parts are substantially less expensive than OEM parts (Property Casualty

Insurers Association of America [PCI], 2009).

The benefit of these tools has been questioned by a variety of groups including consumer

groups as well as interest groups representing some body shops and parts manufac-

turers. The resulting debate has prompted legislation and litigation intended to place

constraints on these practices. For example, there has been proposed legislation requir-

ing automobile insurers to pay for more expensive OEM crash parts, and imposing

restrictions on insurers’ operation of DRPs. Similarly, there are examples of litigation

to suppress the use of aftermarket crash parts via class action torts and patent law. In

contrast, there are a variety of studies that have supported the use of these measures

citing reductions in fraud, decreases in repair times, and decreases in costs that benefit

consumers and insurers.

In this article, we evaluate the arguments for and against the use of DRPs and non-OEM

parts. We also provide initial economic analysis of the issues as well as a review of

the legislative and judicial activity in the area. The discussion, analysis, and evidence

presented in this study should be useful to policymakers at the state and federal levels

currently considering legislation affecting DRPs and aftermarket parts.

The remainder of this article is organized as follows. In the section “Framing the Issue:

DRPs, Aftermarket Parts, and Competitive Markets,” we describe issues arising from

insurers’ use of DRPs and aftermarket parts in the context of market competition and

consumer welfare. In the section “Economic Analysis,” we provide economic analysis of

these issues. In the section “Judicial Responses to Insurers’ Use of DRPs and Aftermarket

Parts,” we summarize and comment on recent legislative enactments and judicial rulings

affecting DRPs and aftermarket parts. Finally, in the section “Conclusion,” we provide

a review of our findings.

FRAMING THE ISSUE:DRPS,AFTERMARKET PARTS,AND COMPETITIVE MARKETS

DRPs: Use by Insurers and Government Oversight

Automobile insurers create DRPs by contracting with certain body shops to repair

insured damage to their policyholders’ vehicles. The shops agree to a fair and reasonable

price for each repair and make other concessions to the insurer,such as providing onsite

rental cars and vehicle storage, as well as agreements to specific guidelines on customer

satisfaction and completion times. In return, insurers recommend these shops to their

policyholders, increasing the volume of business for the shop. Both parties benefit from

this agreement. Insurers pay a competitive price for repairs and ensure a convenient,

expeditious claim experience for policyholders. Body shops are able to justify these

concessions based on reduced marketing expenses and economies of scale.

Although DRPs have existed since the 1970s, the most significant growth came in the

1980s and 1990s. A recent survey estimates 62 percent of body shops participate in DRPs