News Trends+Analysis

The Rise of Performance-Based Agreements

Order Reprints
Performance-Based Agreements

In the third quarter of 2015, CARSTAR Auto Body Repair Experts signed its first performance-based agreement (PBA) contract with an insurer. Nearly two years later, Arlo Johnson, CARSTAR’s vice president of insurance relations, says that the majority of the network now participates in some type of PBA, and he expects every location will participate in at least one by the end of 2017.

PBAs are an extension of traditional direct repair program (DRP) contracts in which shops are responsible for meeting specific KPI goals. If those goals are not met, Johnson says, the shop is liable to the insurer.

Representatives from Liberty Mutual, State Farm and Progressive declined to comment for this story when reached by FenderBender.

Johnson says that he envisions many insurers trending toward this type of agreement—and not just for major networks like CARSTAR. Craig Camacho is the vice president of marketing and business development at 3D Auto Body & Collision Centers, a seven-shop MSO in Pennsylvania, and he has already seen similar changes to his company’s partnerships. Though he feels that all DRP agreements are essentially performancebased, he’s noticed that insurers have become stricter about enforcing performance standards over the past few years, which could explain the increase in PBAs.

DRPs are not ideal for every shop; PBAs aren’t, either. But Johnson and Camacho agree that this trend is unavoidable for shops participating in insurer programs. But, if businesses are set up to properly handle the requirements, there are ways for shops to benefit within a PBA model.

Higher Level Commitment

As Camacho stated, all DPR agreements are in one way or another based on performance.

If an insurer is not happy with a shop’s performance, that shop can be dropped from the the program. The difference, Johnson explains, is that a traditional DRP is like dating an insurer and a PBA is more like marriage; there’s more commitment and in certain ways, the stakes are higher.

Through a PBA, specific KPIs set by the insurer are spelled out in the agreement, Johnson says. Those KPIs vary, but he says that in his experience, the most common ones are cycle time and CSI. Under a PBA, a shop is required to meet those KPI goals and if those are not met, the shop is liable for whatever adjustment is necessary. Johnson says the penalties vary, but it could be a payment back to the insurer or a forward-looking adjustment on estimates for a certain period of time. It all depends on how the contract is written.

Why Sign?

“Yesterday, a shop may have been on a DRP program that didn’t have any penalties,” Johnson says. “Today, shop owners are operating where they may have to pay if they don’t meet certain objectives.”

With the threat of financial penalties, it may be daunting for shop owners to sign a PBA, but Johnson points out that there are benefits to this type of agreement versus a traditional DRP.

“A PBA can offer a sense of protection,” Johnson says. “With this type of agreement, you are a true partner to the carrier in a sense that underperformance is measured and addressed.”

Johnson goes on to explain that an insurer involved in a PBA will work with a shop to bring it up to par, but an insurer involved in a traditional DRP might drop a shop without offering the opportunity to improve.

Camacho adds that shops that are performing well will get the lion’s share of the work sent to them. Johnson adds that even though both types of agreements have referral lists, shops under a PBA with an insurer may be more likely to get the top spots on the list.

The Right Fit for a PBA

Camacho says that before a shop owner makes the decision to enter into a PBA, he or she needs to understand the numbers and make sure that it will work for them.

“Let’s just say a shop is making three, four, five, six percent net and you have to kick back three percent of that to the insurer,” Camacho explains. “That’s going to hurt a shop’s bottom line.” 

In order to avoid that situation, Camacho says that it’s important for shop owners to know where they stand when it comes to KPIs, especially CSI, and to make sure they have the capability to handle the volume of work that may be sent to them.

Camacho adds that he believes MSOs are more suited for PBAs than independent shops, but that it doesn’t necessarily have to be a large MSO. He believes shops that are able to load level will do particularly well with PBAs. Johnson feels it’s about being more in-tune with KPIs and how to properly manage them—something that he says is more stereotypical of larger companies. For independent shops already concerned with losing large accounts to consolidators, signing a PBA may offset that risk.

How to Succeed

Johnson says that constant communication is key. The goals of the PBA need to be clear not only to the shop owner, but the entire staff. Johnson says the KPIs that a particular agreement is focused on need to be clear and how a shop is performing needs to be communicated on a monthly and quarterly basis. Johnson adds that the carriers that he’s worked with have generally been good about reviewing shop performance. He says that the carriers and the shops need to work together to analyze what is driving performance in certain areas.

Related Articles

A Look at Performance-Based Agreements

The Rise of Usage-Based Insurance

You must login or register in order to post a comment.