Auto glass claims have long been viewed as nuisance claims by many carriers, but that nuisance has become the plague of the insurance industry. Claim harvesting, litigation, and price gouging are the culprits. The recent surge of auto glass claims has caught the insurance industry off-guard.
While frequency skyrockets with no signs of improving, historic underwriting models no longer apply. However, looking more in-depth at the antidote actually provides clarity about the original cause of the disease. It is common to waive the deductible for glass repairs because the severity is much lower than if the windshield is allowed to completely crack out — which would require a replacement. How then, is it possible that this remedy, which is intended to lower severity, has become a cancer that drives claims off the charts and increases costs to the carrier?
The practice of claim harvesting in the auto glass industry became popular in the gas stations, car washes, and quick lubes of Arizona. Now, an organization based in Arizona is spreading the concept nationwide by sending commissioned sales staff door-to-door. They even canvass parking lots to identify and sometimes create glass damage, so that they can offer the insurance customer a “free” glass repair or replacement service. The practice is lucrative for this organization. With dollar signs in their eyes, they are taking their business model nationwide, targeting zero-deductible markets, and helping to drive the increase in auto glass claim frequency.
Even prominent national chains are not immune from employing similar types of tactics, although on a decidedly more sophisticated level. While promoting the benefits of repair (instead of replacement) is marketed as a means to lower severity by reducing the cost per claim, the ugly trend has emerged whereby the antidote of windshield repair leads to an increase in frequency.
In some models, repair is used as a conventional “bait and switch” strategy to offer something for free because the deductible is waived. In other applications, repair is aggressively advertised with unprecedented vigor to drive frequency. While a legitimate argument exists that severity is reduced with either approach, the facts reveal the amount of gross dollars that a carrier pays increases considerably when these tactics are employed.
The reason these tactics are employed comes down to dollars and cents. The TPA responsible for feeding business to its manufacturing, wholesale, and retail outlets benefits greatly from increased claims, no matter the form. These two combined dynamics are causing unprecedented increases, with many carriers reporting that their glass claims have swelled by as much as 25 to 30 percent.
Concurrent to these activities, many independent retailers are pursuing coordinated legislative agendas that have the potential to interfere with and harm the relationship between the carrier and its policyholder. Disguised as a consumer choice campaign, these glass retailers desire to become beneficiaries of the insurance policy in case of a glass loss. Most notably, the Independent Glass Association (IGA) is encouraging its members to add “assignment of proceeds” language to their invoices, so it is then able to sue the carrier in the event that excessive rates are not paid in the full (inflated) invoiced amount. Not only do carriers find that they are getting gouged for the glass installation, but they often are saddled with legal fees for both themselves and the plaintiff. This strategy has worked well enough in some states that the trend is likely to go national.
All of this, coupled with the cash versus insurance pricing, further exacerbates the problem. The practice of charging the insurance carrier a premium puts the carrier at a distinct disadvantage over a cash-paying customer. It is reasonable to expect that a carrier consolidating 5,000 or more glass claims annually would be able to buy glass at least as cost effectively as a cash consumer who might purchase one windshield every eight years. However, that is simply not the case. Typically, carriers pay a 30-percent or greater premium above what a cash consumer pays. Does this sound impossible? Shop your own windshield or back glass in the cash market and compare that to what your costs are through your glass TPA.
Recognizing that your interests may not be aligned with your TPA or retail providers, what can insurers do to minimize the spread of the “cancer” throughout your business? I suggest four primary strategies:
Make sure that your business partner or glass provider has a common set of goals and the same objectives as you do. If your pain is their gain, then expect the pain to continue. Seek a model that is free of obvious conflicts of interest. It is not likely that the benefiting party will give up their primary profit center for your benefit.
Minimize the cash versus insurance price disparity by introducing competition to your program. There is one reason (and one reason alone) that cash customers enjoy better pricing compared to the insurance community. A glass shop must compete for its business. If the glass shop fails to offer the most competitive offering, then it loses the order.
Carriers can embrace a similar model, however. In recent years, the market has been deprived of competition. This has yielded not only higher costs, but it has also driven and fostered much of the litigation to which the industry has been subjected. When glass retailers feel that their access to the market has been cut off, they get desperate and revert to litigating their way to success. Desperate people do desperate things. Unfortunately, there is a new wave of legislation being introduced across the country to reflect this dynamic.
Get out of the glass business. Albeit an extreme move that may have an adverse impact on policyholder retention (because policyholders are accustomed to having glass coverage), this may prove to be the direction that the industry moves if problems persist and the retail glass industry drifts into this ethically challenged abyss.
An interim (and less extreme) step may be to stop waiving deductibles entirely, or at least when the deductible is $250 or more. The fact is that waiving deductibles for repair is a voluntary practice — except in the state of Texas, which mandates such action — not a contractual obligation for most carriers. The policy only started as a good faith effort to encourage more policyholders to recognize the viability of repair, which, at one time, served as a win-win for both the carrier and its policyholder. The carrier saved money compared to replacement, and the policyholder didn’t have to fork over his or her deductible.
Today, however, that practice (tool) is being exploited, and it is becoming a weapon against the carrier in an effort to create additional claim frequency. Is it possible that repair is no longer an absolute positive? As a founding member of the National Windshield Repair Association (NWRA) who is committed to my insurance clients, I am starting to wonder about the answer to that question. State Farm, for instance, no longer waives the deductible for such repairs, and a small handful of other carriers have followed suit.
Policy language changes should be considered. Suggestions include ensuring that you limit your liability to only paying rates that you are able to otherwise secure in the market, restricting the policyholder’s ability to assign proceeds (current language is not working), and requiring the policyholder to report the loss prior to contacting a vendor.
Overall, the glass market has changed for the worse and has become more than just a nuisance. If your glass program has not been reviewed and enhanced to reflect the challenges of today’s market, then you might find yourself dealing with a nightmare.
Paul Gross serves as President and CEO of Insurance Claim Management (ICM), the parent company to HSG and CodeBlue. He may be reached at firstname.lastname@example.org