PREFACE:
This article consists of the text of the keynote presentation delivered at the Strictly TPAs event held in Nashville, Tennessee, in November 2017. In this presentation, I reviewed the history and current state of and made projections for disaster restoration, managed repair, and third-party administration (TPA) programs. These programs have grown over the years and will continue to increase in market share.
Before I dig too deeply into the subject, I want to provide my perspective. My top motivation is to help create successful businesses. There is not a single path to success — other than to operate with integrity. Given this position, I believe TPAs are both good and bad. I will explain the various positive and negative factors later in this article. It is important that restoration companies create a strategic plan and then make deliberate decisions based on this plan. I see many companies that jump into programs and then find they become too large a portion of their business or find that their business was not set to work well in the TPA environment. Others have operated effectively and created a strong business based on their participation in programs. Either of these situations can set up your business for failure. I believe no source should account for more than about 20 percent of your overall business. If you limited the influence of any work source, then you remain in control of your business and your strategy. When this gets out of balance, you run the risk of being manipulated in that relationship.
There are many in the industry who believe that pursuing relationships with TPAs is akin to lemmings jumping off a cliff and then swimming to their death. They would say restoration companies participating in these vendor programs lack creativity in their marketing approach and are setting their business up for failure. This failure is due to the vendor’s influence on scoping, pricing, and claims (or claimant) treatment.
The other side of this discussion will state that you cannot change reality and the TPAs will control the vast majority of claims. Their argument is that if you are not participating in these programs, then you are continually getting a smaller piece of the pie. How can you argue with the outward success of so many restoration companies? A visit to the Crawford Contractor Connection’s event every year demonstrates that many restorations companies are operating in this environment and achieving success.
This reality has continued to impact the industry, because previously it was assumed that in most years, insurance would lose money on claims but make it up from investing activities.
HISTORY
Let’s look at the contributing factors to the emergence of TPAs. Back in the early 1990s, maybe late 80s, Mr. Jay Southerland founded Prism, the first iteration of a restoration managed repair program. This program was created out of an apparent need for better claims control and management in the industry. Prism was sold and then later purchased by Crawford and Company. It took time to change the process for managing claims in the industry, and at the same time, there were many contributing factors that drove the need for this change. Prior to the 1990s, restoration was fractionalized. There were few large or nationally recognized names. Franchises existed but did not have good control over work quality from location to location, and the standardization of process was loosely defined. The industry had no standards and work quality, and scope varied widely from contractor to contractor and market to market. Pricing was inconsistent and largely dependent on the relationship between the restoration company and the adjuster. This situation often led to opportunistic pricing as well as relatively arbitrary approvals by the adjuster. These realities created a comfortable situation where, to a degree, all business was local.
BUSINESS TRANSFORMATION
In the 1990s, the business world started to change, which laid the groundwork for the changes that would transform the claims industry and create the realities you see today. When I first learned to estimate restoration, I would look at a job, then determine the cost of materials, and estimate the required labor to install the products. A realistic and defendable price would be applied and broken down into units for estimating purposes. It might have been 1991 or so when we purchased an estimating program called Project, and shortly thereafter we picked up our first copy of Xactimate. It turns out that standardized pricing was essential to any vendor program, and Xactimate became the vehicle to make that happen. It was about this time that electronic and digital communication was becoming a reality. I recall coming into the office to find a 30-page adjuster estimate rolled up on the floor in front of the facsimile machine. We networked our computers and found this was becoming a means for immediate (although very slow compared to today’s standard) communication. I recall meeting with the claims manager of a major insurance company in 1993 and was very excited to find out that they were putting together their first mitigation (at that time they called it drying) program. I knew we were a shoo-in; we were hands down the best drying company in our area. We had made investments in drying equipment and training for years. However, I was very surprised when the claims manager (who was disappointed) told me that a large national franchise would be handling the claims and it was out of her hands. I figured it was only a matter of time for them to come back and include us in their program. But it never did.
FAULTY RESTORATION ASSUMPTIONS
- A misconception is that insurance companies use competence as the top judge of contractor selection. The reality was that the company offering the strongest incentive was the one chosen to be the preferred contractor. Often the incentive was simply that the job would be done well and the customer would not constantly complain to the adjuster. Other times it was more nefarious and unethical, or illegal benefits were used to influence contractor selection.
- Another misconception is that the customer can tell the difference between the qualities of work completed by various companies. In reality, most property owners judge the quality of the work based on the people completing the work rather than the work itself.
- Finally, professional restorers need to realize that as an industry, not all companies operated out of a desire to create value for the insurance company and property owner.
Too often this was not the case, and the main motivating factor was how much profit could be squeezed from each job. happened. The insurance world started to change in the 1990s, as well: GEICO was purchased by Berkshire Hathaway. They quickly proved that you had a competitive advantage when you could make money on the claims loss ratio and have a negative cost of investing. This reality has continued to impact the industry because previously it was assumed that in most years, insurance would lose money on claims but make it up from investing activities. The confluence of factors listed above, and more, transformed our industry and made today’s claims programs possible.
MANAGED REPAIR PROGRAMS
Insurance companies have been working in managed repair programs for some time in other verticals of their business. HMOs were started in the 1930s to help manage health care coverage and costs. Auto glass and auto repair programs have not been around that long, but have been in existence for decades. Property restoration is more complex than many other areas insurance covers. However, these companies are familiar with programs, and implementing in the restoration process is natural.
The industry is in a quick and potentially radically changing situation. If changes are becoming more rapid, then I think it makes sense for insurance companies to engage a claims specialist to manage this change.
I recall reading an article in Claims Magazine about two decades ago that discussed the success of an auto vendor program. It was interesting to me to discover the article claimed that clients were much happier when utilizing the managed repair program for auto repairs. For many reasons, I believe this to be true in the restoration industry, as well. As it turns out, insurance companies want their policyholders to be happy with the insurance they purchased. If people are happier with claims where the insurance company uses a preferred vendor in a managed claim environment, then it makes sense that you will experience this more often.
It also makes sense that insurance companies are looking for big solutions to managing claims — not individual project solutions. In the past, companies looked to franchise groups for claims solutions. It was about 10 years ago when I attended my first Crawford Contractor Connections event. I encountered what I call a colorblind environment. Every color (independent and franchise) was represented: bright yellow; bright green, black; blue and red; and more. It became apparent to me that this allowed insurance companies to choose the best available contractor regardless of affiliation in each market — the TPA took care of vetting and managing the contractors.
The current insurance industry trends are favorable for the TPA claim environment. The industry is in a quick and potentially radically changing situation. If changes are becoming more rapid, then I think it makes sense for insurance companies to engage a claims specialist to manage this change. One of the biggest influences in claims focuses on the reduction of cycle time. Managing dates and times appear to be a core competency for most TPAs. Insurance companies and TPAs by their relationship have a large focus on reduction in cycle time. This focus begins with the First Notice Of Loss (FNOL) and continues through payment to file closure. Many of the other trends are connected to this focus. Integrated communications systems will be used to quickly identify damages, verify coverage, improve subrogation and limit fraud. These will also be utilized for improved client communications throughout the process.
New insurance products and companies are being created. Some of these are virtual companies without claims resources, and other established companies have created virtual processes to meet the expectations of their younger policyholders. Video communication may be utilized to create a virtual adjusting environment where much of the adjusting functions are completed from an office or even by utilizing artificial intelligence. A race to be the point of first notice of loss assures control of the claim. I expect this to be a robust area of competition and innovation, as it is the key to the other portions of claims management.
In the next article, I will explore the new face of claims and some of the changes that will impact the claims environment that may be favorable to the managed repair networks and third-party administrators. RIA
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