The Chicago Auto Glass Group has released its revised ...



The Chicago Auto Glass Group has released its revised white paper regarding the development of insurance payment benchmarks. For more information please also see GlassBYTES articles “Chicago Group” Unveils Pricing Plans (May 1, 2004) and The Chicago Auto Glass Group Releases Details of Pricing Formula (May 5, 2004).

GUIDE TO DEVELOPING INSURANCE PAYMENT BENCHMARKS FOR

AUTO GLASS REPLACEMENT CLAIMS FULFILLMENT

Introduction

This Guide to Developing Insurance Payment Benchmarks for Auto Glass Replacement Claims Fulfillment (this “Guide”) has been adopted as of April 12, 2004, by the Chicago Auto Glass Group NFP, an Illinois not for profit corporation (“CAGG”). This Guide is intended to serve solely as a recommendation for establishing benchmarks and is in no manner intended to set or determine actual prices for auto glass replacement or to reduce open competition in the local, regional, or national market place.

Background

CAGG believes that it is desirable for there to exist a new insurance claims fulfillment benchmark payment guide in light of the fact that the benchmark payment guide currently being utilized in the auto glass replacement industry does not adequately reflect market realities. Accordingly, CAGG has developed this Guide in order to: (i) anchor benchmark payment schedules to a verifiable real cost base; (ii) provide benchmark payment schedules that are reflective of actual competitive market pricing; (iii) provide benchmark payment schedules that address material and labor costs as separate issues; (iv) provide benchmark payment schedules that are accepted as fair and reasonable; and (v) provide benchmark payment schedules that promote competitive pricing throughout the auto glass replacement industry.

The Guide

1) Purpose. The purpose of this Guide is to provide a basis for the establishment of benchmark payment schedules for use by insurance companies in the fulfillment of auto glass replacement claims on the terms set forth below.

2) Definitions. Capitalized terms used, but not defined in this Guide shall have the meanings set forth on Exhibit A attached hereto.

1) Benchmark Base Cost. Benchmark Base Costs are anchored to Truckload Offering Prices from major auto glass manufacturers to Auto Glass Distributors and warehousing Auto Glass Retailers. Cost used will be actual price paid when auto glass inventory is purchased for stock using standard truckload purchase process. Special buys at lower costs and short buys at higher prices will not be used in determining the Benchmark Base Costs.

a) Selected volunteering Auto Glass Distributors and warehousing Auto Glass Retailers will submit Truckload Offering Price documentation to the Independent Third Party on a scheduled basis. Documentation will include Truckload Offering Price schedules as well as actual invoice documentation for purchases made.

b) The Independent Third Party will analyze the cost information provided and prepare recommended Benchmark Base Cost schedules.

c) The Independent Third Party will select the Auto Glass Distributors and warehousing Auto Glass Retailers who will be asked to submit cost documentation, and will determine the appropriate format for reporting such information.

d) The Independent Third Party will have the authority to conduct such audits of the records of the Auto Glass Distributors and warehousing Auto Glass Retailers as it deems necessary to validate information submitted to it.

2) Benchmark Retail Costs. A schedule of Benchmark Retail Costs shall be prepared by the Independent Third Party based on the Benchmark Base Costs and verifiable industry operating expense factors obtained from surveys solicited from selected Auto Glass Distributors by the Independent Third Party.

a) Selected Auto Glass Distributors will submit the information deemed necessary by the Independent Third Party for determining representative industry operating expenses, including:

i) Inventory Shrink as a percentage of cost;

ii) S&A Charges as a percentage of cost; and

iii) W&D Charges as a fixed dollar per part.

b) The Independent Third Party will analyze the information provided and develop numeric values which can be used to establish Benchmark Retail Cost schedules using the following formula:

Benchmark Retail Cost = Benchmark Base Cost + (Inventory Shrink x Benchmark Base Cost ) + (S&A Charge x Benchmark Base Cost) + W&D Charge

a) The Independent Third Party will select the Auto Glass Distributors to be invited to submit data for the development of Benchmark Retail Cost schedules, and determine the appropriate format for the reporting of such data.

c) The Independent Third Party will have the authority to conduct such audits of the records of the Auto Glass Distributors as it deems necessary to validate information submitted to it.

3) Benchmark Insurance Replacement Payments. A schedule of Benchmark Insurance Replacement Payments for auto glass parts shall be prepared by the Independent Third Party based on Benchmark Retail Cost schedules and representative industry profit margins realized in a competitive environment, as determined by the Independent Third Party.

a) Selected Auto Glass Retailers shall submit surveys, in the format developed by the Independent Third Party, to provide the data needed to determine a required Gross Margin Base and a Retail Multiplier which would yield a reasonable average per job gross profit for the Auto Glass Retailer and offer competitive pricing for the Insurance Company Customer.

b) The Independent Third Party shall analyze the information provided and determine the Gross Margin Base and the Retail Multiplier to be used in calculations for the Benchmark Insurance Replacement Payment schedules.

c) The Independent Third Party shall apply the determined Retail Multiplier to a representative mix of auto glass parts and compare the results to representative retail market pricing as reported by Auto Glass Retailers in surveys provided. The Independent Third Party shall then determine an Adjustment Factor that results in benchmark pricing that reflects representative pricing.

d) The independent third party shall apply the Retail Multiplier, the Gross Margin Base, and the Adjustment Factor value to the Benchmark Retail Costs, using the following formula to produce a Benchmark Replacements Parts Payment schedule:

Benchmark Replacement Parts Payment = Retail Cost x Retail Multiplier – ((Retail Cost x Retail Multiplier – Retail Cost) - Gross Margin Base) x Adjustment Factor

e) The Independent Third Party will have the authority to conduct such audits of the records of the Auto Glass Retailers as it deems necessary to validate information submitted to it.

4) Benchmark Insurance Payment for Labor. A schedule of Benchmark Insurance Payments for Labor shall be prepared by the Independent Third Party based on available time studies published by various automotive industry groups. The Independent Third Party would select appropriate time studies acceptable to the auto glass industry as well as the insurance industry, and adjust them as necessary to reflect actual time to complete glass parts installation, clean up, and other labor functions appropriate for delivery of replacement auto glass to the end-user in properly completed state. The Independent Third Party will establish a schedule of Benchmark Insurance Payments for Labor based on data submitted by Auto Glass Retailers and labor rates from other automotive repair industry business.

a) Labor costs are a per hour rate based on published labor time schedules.

b) Per hour labor cost is the local competitive hourly auto glass industry rate as negotiated to be acceptable to the insurance industry. The prevailing local body shop repair rate is recommended for adoption by CAGG.

5) Benchmark Insurance Payment for Installation Kits. A schedule of Benchmark Insurance Payments for Installation Kits shall be prepared by the Independent Third Party based on survey results obtained from selected Auto Glass Retailers. Benchmark Insurance Payments for Installation Kits shall be based on a per kit price.

6) Benchmark Payments for Moldings and Attachments. A schedule of Benchmark Payments for Moldings and Attachments shall be prepared by the Independent Third Party based on published manufacturers’ suggested retail pricing schedules.

7) Market Adjustments to Benchmark Schedules. It is desirable that insurance payments for auto glass replacement claims fulfillment reflect local competitive market conditions. Any adjustments (discounts or premiums) to benchmark insurance payment schedules, to reflect local market conditions, should be accomplished through negotiations between insurance companies and auto glass retailers.

8) Disclosure of Information to Independent Third Party. All information submitted to the Independent Third Party shall be submitted on a confidential basis, and in no event shall the Independent Third Party disclose any of the information submitted to it to any party, except in connection with the production of the schedules contemplated herein.

Definitions

Adjustment Factor: A numeric value used for reducing the variances from per replacement average by adjusting the Benchmark Insurance Replacement Payment, up or down, toward the average per claim payment for the Insurance Customer and the average gross profit per sale for the Auto Glass Retailer.

Auto Glass Distributor: A business entity that purchases auto glass parts in bulk for resale, warehouses these parts, and sells them to auto glass retailers.

Auto Glass Retailer: A business entity that sells and installs auto glass products for the end user typically to fulfill an insurance claim.

Benchmark Base Cost: The benchmark cost for auto glass parts from the glass manufacturers established by the Independent Third Party from Truckload Offering Price information provided by Auto Glass Distributors.

Benchmark Insurance Replacement Payment: A recommended benchmark auto glass replacement payment for insurance companies to use in fulfilling insurance claims.

Benchmark Insurance Payment for Parts: A recommended benchmark insurance payment for auto glass parts for the settlement of an insurance claim.

Benchmark Insurance Payment for Labor: A recommended benchmark insurance payment for installation of replacement auto glass for the settlement of an insurance claim.

Benchmark Insurance Payment for Installation Kits: A recommended benchmark insurance payment for installation kits required in replacement of auto glass for the settlement of an insurance claim.

Benchmark Retail Cost: A recommended benchmark wholesale selling price for auto glass parts sold to retailers by Auto Glass Distributors. Also, a recommended benchmark cost for a warehousing Auto Glass Retailer after accounting for warehousing costs.

Gross Margin Base: The average auto glass parts revenue available to an Auto Glass Retailer after deducting the Auto Glass Retailer’s cost of auto glass parts from the total selling price of auto glass parts for insurance replacement claims.

Independent Third Party: A certified public accounting firm or similar entity, having no bias toward interested parties, charged with responsibility for data collection, financial reporting validation, or establishment of benchmark parameters.

Insurance Company Customer: Any insurance company, or it’s agent, responsible for fulfilling auto glass replacement claims.

Inventory Shrink: Auto glass inventory reduction due to breakage, obsolesce, and other causes.

Retail Multiplier: A numeric value adopted to apply to the Benchmark Retail Cost of auto glass parts for use in calculating Benchmark Insurance Replacement Payments. The Retail Multiplier applied to the average retail auto glass parts cost will yield the average insurance auto glass parts payment.

S&A Charge: The charge applied for consideration of business related sales and administration costs as well as allowance for reasonable return on investment.

Truckload Offering Price: The price, after any applicable discounts, offered by auto glass manufacturers to Auto Glass Distributors and Auto Glass Retailers for purchase on standard truckload purchase terms.

W&D Charge: The charge applied for consideration of cost related to warehousing and delivery/distribution of required auto glass parts.

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