Shining Light on the “Auto Claims Economy”

As the “blackout of 2003” rolled across southern Ontario and a large part of the northeastern U.S. and the mid-west region of the U.S., delegates and speakers at this year’s CARSTAR conference held in Toronto were left in an ominous darkness. Was this a dark omen to the future relationship between insurers and collision repair vendors?

Hardly, the conference participants say. In a testament to the desire of the participants to forge closer relationships, the conference sessions continued with the “auto claims economy” taking center-stage. Sam Malatesta, senior vice president of CARSTAR Automotive Canada, notes that the collision repair industry is the “hub” of the claims process, and in this respect needs to assert itself to a greater extent in the auto claims economy. “There has never been an organized voice for collision repair,” he adds, which is a disadvantage when dealing with other, larger players involved in the claims process. “We’ve got to be that big, we’ve got to think that big.”

Familiar concerns

Collision repair shops are struggling with many issues, some of which will sound familiar to insurers. Among those concerns are profitability, government regulation, technology, consolidation and staffing, notes Larry Jefferies, executive vice president of franchise operations for CARSTAR. As well, Malatesta adds, bodyshops have to contend with a poor public image, exacerbated by the media. “There’s no strong brand name people trust.”

Over-capacity may be the toughest challenge facing the industry. There are about 8,000 bodyshops in Canada, says Malatesta. “We only need 2,000 or 3,000.” About half of those 8,000 shops are only repairing two cars a week. Jefferies points out that, at present, only about 10% of bodyshops are responsible the bulk of business. “We really only need about 800 shops. Those 800 are doing almost all the work.”

Profitability has become an increasing concern for shops in this atmosphere, with 10% of the shops in Alberta closing their doors between 2002 and 2003 alone. Jefferies espouses efficiency rather than raising prices as the route to improving margins. Global repair shop models show that achieving predictable volumes of business, using the latest technology can lead to efficient shops focused on the most profitable business.

Another formidable challenge is technology. “IT deployment is a business, if you invest your money and don’t get a return on investment, then you’re going in the wrong direction,” says CARSTAR CEO Sam Mercanti. For bodyshops, technology is a means of keeping data flowing between shops, consumers and insurers. “Our insurance partners want it [data], they’re screaming for it. Data takes the ‘fog’ out of a relationship.” This is a big step for an industry where people are “used to picking up the phone”, notes Jefferies. “When are we going to wake up to the technology that’s right in front of us?” The shops, vendors and others in the claims chain who do not move to the latest technologies and the most efficient models will not last, he predicts. “You have to add value or get out of the way.”

Changing process

Insurers also face the challenge of technology, of balancing “nice to have” with “need to have” investments, notes Wendy Hillier, vice president of claims for Aviva Canada. They are also dealing with the same threats as bodyshops, including training and recruitment issues.

But, right now, insurers are struggling with public perceptions and profitability to a far greater degree. “The auto insurance industry is front and center in all the papers. Consumers are crying out to all governments who will listen on auto insurance issues,” Hillier says. And, following on the heels of New Brunswick and Nova Scotia, there is speculation that auto insurance could become a factor in the Ontario election expected this fall, she adds.

Bodyshops have seen the manifestation of this in consumer pay rates – the percentage of claims that are paid directly by the vehicle owner rather than through an insurance claim. These rates have risen dramatically, up to almost 40% in some areas, notes Jefferies, “because they [consumers] are so afraid of losing their insurance”. Rather than face stiff premium increases or risk losing their coverage altogether, consumers are picking up the tab on collision repairs.

Claims costs have outstripped premiums in every province. The positive news for bodyshops, however, is that collision repair costs are not the villain, notes Hiller. It is personal injury claims costs that are playing havoc with insurer balance-sheets. Nonetheless, both sides of the equation – insurers and bodyshops – need to look for new areas of efficiency and cost reduction. In this respect, Jefferies observes that in the provinces where auto insurance is government-run, those public insurers are “looking more like private insurers” in terms of seeking out direct repair programs to reduce their overhead costs.

Leveraging volume

Auto physical damage claims total $1.2 billion a year, at an average of $2,647 per claim, compared to $6 billion in auto insurance premiums being brought in, notes Hillier, making it a very significant market.

Insurers are looking for cost containment, and therefore expect bodyshops to deliver a quick, cost-efficient and quality turnaround, Hillier says. The solution to this lies in leveraging volume and vendor relationships. “We need to leverage our collective share of the market and demand more.” She asks the question: Are collision repair shops leveraging volume commitments with vendors and suppliers? This includes original equipment manufacturers, aftermarket suppliers and salvage/recyclers (see chart), Hillier notes.

CARSTAR research in conjunction with its “insurance advisory group” reveals that, while the average collision job costs about $2,300 and takes approximately 22 hours to finish, the current turnaround is actually around 11 days, observes Mercanti. “That 11 days has got to get closer to 22 hours,” he adds.

A significant factor hindering efficiency in the collision repair industry is volume of business – or rather the lack thereof, says Malatesta. Bodyshops are looking not only for higher volumes, but predictable volume, he adds. “No one would build a plant without knowing how much product was going to be manufactured tomorrow. This is what needs to happen in our industry, to get the efficiencies we don’t have in our industry right now.”

And, Malatesta observes, repair shops are dealing with 30 to 40 different insurance companies, each with a different claims process and philosophy. Market research, he notes, indicates that about 67% of consumers would go to a specific repair facility if they were “rewarded” for doing so by their insurer through lower premiums. In this respect, he points out that, “ultimately, it isn’t the insurance industry causing the changes, it isn’t the paint companies, it isn’t CARSTAR – it’s consumers”.