Smash! Birth of the Ace

Both insurers and their collision repair partners are facing difficult times, with costs rising and marketshare scarce. Consolidation in either industry has not brought about the kind of cost efficiency dreamed of. Perhaps it is time to see “the big picture” and better understand the role these two industries play in a much larger global claims economy.

The “auto claims economy” (ACE) includes those industries whose transactions occur as a result of, or immediately after a motor vehicle collision. For example, the first to arrive at the scene of the accident are the towers, police cruisers, or depending on the severity, fire fighters, and an ambulance.

If there is bodily injury that requires immediate care, victims are taken to the emergency room at the nearest municipal hospital. The consumer notifies their insurance broker and/or their insurance company to begin the claims process, either adjusted inhouse or through an independent adjuster. If the vehicle is repairable, typically, the consumer is referred to a preferred collision center, although the choice of shops remains theirs, and receives a replacement vehicle.

Once the vehicle is in the repair center, the auto claims economy turns to the collision repair supply chain. Appraisal technology is used to accurately assess the damages, parts are purchased (OEM, used or aftermarket) and labor is applied to the vehicle. Refinish products and materials are then applied to the vehicle. If the vehicle is not repairable, the auto salvage industry buys the vehicle and either resells it, or inventories the parts for resale. The consumer negotiates with the insurer a fair market value for the vehicle and the insurer cuts a cheque.

If the consumer experiences injuries as a result of the collision, they are likely to receive treatment from a “caregiver”, which could include rehabilitation clinics, chiropractors, etc. Litigation services for settlement are used when required. The sum total these industries contribute to Canada’s gross domestic product is well over $50 billion.

SHARED CONCERNS

The players within the auto claims economy have several business issues in common. For one, they are typically industries that are fragmented and require consolidation. Among the examples of the industries presented only a few have realized the efficiency gains that consolidation seductively presents. The others are still working on it. The problems plaguing the auto claims economy are lack of communication between related parties, lack of a clear understanding of one another’s business, and an inability to take into account the auto claims process as a whole.

Primary areas of focus within the vertical markets of the auto claims economy include:

Building strong brands for the consumer and/or business partners (although some of the world’s strongest brands participate in the economy);

Introducing a common technology platform that works, is inexpensive and simple to use;

Developing business systems and processes that are replicable and can be audited;

Providing the ongoing training requirement to improve skill sets and attract the right human resources; and

Building an environment where there is a profitability focus so that shareholders’ needs are met.

This provides an alternate view of the challenges and the opportunities within our respective businesses and, as Albert Einstein once said, “we cannot solve the problems of today with the same mindset with which we created them”.

P&C ENVIRONMENT

The property and casualty insurance industry in 2001 saw claims grow 11.7% to $16.2 billion, outpacing annual growth in net premiums written of 10.4%. The industry’s 2001 combined ratio was 110.3%, and ROE a dismal 2.7%, well below shareholder expectations.

For the first nine months of 2002, claims were up 8.6%, and the industry’s underwriting loss stands at $765 million, despite price hardening. Industry consolidation has not brought the cost efficiencies hoped for. Issues that continue to be at the forefront of the p&c insurance industry are price, distribution, claims, and technology.

THE CLAIMS “HUB”

Who would have thought from the blacksmith would emerge the industry that would become the “hub” of the auto claims economy. The collision repair center is the meeting place for consumers and suppliers. A variety of research has been published over the last three years that has proved a positive correlation between claims satisfaction and customer retention for the insurer. The collision repair center is where the consumer spends the majority of their time during the auto claim and is typically the only place where they receive “face to face” service. This experience can either make or break claims satisfaction.

Although this industry is presented with unprecedented opportunity, it is faced with serious challenges, including improved efficiency and profitability, attracting and retaining qualified manpower, accreditation standards, harnessing technology power, and aiming for growth in a shrinking marketplace. Other areas of the world have faced similar challenges and a summary of the current situation in selected markets around the world includes:

Netherlands. This country has about 6.5 million vehicles, 2,260 repair facilities with average sales of US$486,000, and an overall collision repair market of US$1.1 billion. As of 2003, manufacturers will be responsible for the vehicle throughout its life. Drivers will have the use of the vehicle, but will not own it.

The U.S. There are about 213 million vehicles on the road, 53,000 repair facilities with US$566,000 in average sales and an overall collision repair market of US$30billion. Of note is the move by one insurer to take control of the collision repair process. One insurer acquired and now operates a chain of collision repair centers, demonstrating the importance of the role of the repair center in the auto claims process.

The U.K. There are about 28 million vehicles, 5,600 repair facilities with a whopping US$1.3 million in average sales each. The overall collision repair market is about US$7.3 billion. Insurers own bodyshops, with a view to securing repair capacity and consistency of service.

Japan. This country has about 73 million vehicles on the road, and about 45,000 repair shops each with US$290,000 average sales. The overall market is US$13 billion and is most unique, with the bodyshop acting as a true “hub”, selling car insurance in an agency capacity and acting as an expanded sales outlet for insurers. Claims are directed toward the insurer’s “agent” shops.

Canada. Here we have a market of 17 million vehicles, 8,000 repair facilities each with US$213,000 sales, and an overall market of US$1.7 billion. Consolidator bodyshop marketshare is high relative to other countries. Market size and demographics position Canada very well for a new business model for auto claims to emerge.

DELIVERING

The consumer is always right… right? Consumers are looking for recognition, respect, trust, fairness and honesty. This is what a Crawford & Matthews study found after interviewing 5,000 consumers. They are looking for more than value, they want a “relationship” with your company.

As insurers are working to rein in claims costs, consumers’ expectations are high and the promise of claims must still be delivered on, especially given the current pricing environment. The most recent Claims Solution Center research study in October 2002 revealed only 27.7% of consumers that experienced an auto claim rated the service as “excellent”.

The consumer is ready for a new business model for auto claims. In fact, 5,808 participants in a study were asked when buying auto insurance, if a discount were offered on the premium, would they commit to having their vehicle repaired at their insurer’s recommended repair center. Almost two out of three respondents said “yes”. The consumer is ready for significant change, the question is, are we?