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There's been much debate in the collision repair industry as a whole and considerable disquiet amongst U.S. body repairers regarding insurance ownership of collision repair shops. In an industry that (on both sides of Atlantic) is struggling for profitability, will the entrance of insurers, with their management skills and financial muscle, create a new breed of supershop, driving down prices and forcing traditional repairers out of business?

The phenomenon of insurer-owned collision repair shops is still in its infancy in the States but is well-established in the UK. For this reason, BodyShop Business editor Georgina Carson asked me (Chris Mann) as an "expert" on the UK body repair industry and close observer of the international scene for my views on this trend and thoughts as to what the U.S. body repair market can expect, based on what's happened in the UK.

Why?
First of all, we have to ask our-selves why insurance companies would want to get involved in body repairs as principals rather than as customers. The simple answer is to save costs - but there are many elements to this and a multiplicity of drivers for insurers, including repair capacity, process control, customer service, economies of scale and leveraging discounts, as well as, I believe, good old-fashioned arrogance. Insurance companies on both sides of the Atlantic - with their glass and chrome offices, IT systems and sophisticated management structures - look at the body repair industry and see an inefficient, unstructured cottage industry lacking management skills and largely driven by independent entrepreneurs who have, more often than not, risen from the shop floor without the benefit of a college degree.

At the same time, these insurers are coming under increasing pressure to reduce costs. I don't know how profitable, or otherwise, insurers are in the States, but I do know that UK and European insurance companies have taken a major battering in recent years. Remember, insurers are geared to make a large proportion of their profits not from underwriting margins, but from the income derived from investing their premium income. This is fine when the world stock markets are rising and not too much of a problem when some markets - e.g. the USA and Europe - are doing well and others such as Japan and South East Asia are struggling, as was the case until relatively recently.

Pre-9/11, Western stock markets were already beginning to show signs of faltering, and the uncertainty generated by the attack on the Twin Towers, the possibility of other unprecedented terrorist acts and the increasing volatility in the Middle East have combined to drag all of the world's stock markets down dramatically, with catastrophic results for both the profitability and asset base of the world's insurers.

It cannot be said, though, that this was the primary driver for motor insurers looking to the repair sector as a potential area of cost savings. This had started long before with the insurers' belief that if only proper management structures and big business practices could be brought to the body repair industry, then massive savings could be had. I have to say that this is, at best, a naive analysis of the collision repair sector, but this hasn't prevented insurance companies from believing that they possessed the "magic bullet" that would guarantee them repair capacity, improve customer service levels and dramatically reduce costs.

Analyzing the UK Market
So what can the United States learn from the experience of the UK market, where several leading motor insurers including Direct Line, Royal & Sun Alliance, Churchill and Norwich Union (CGNU) have a direct involvement in body shop operations? Firstly, we must look at the differences and similarities between the two markets.

Since the beginning of the 1990s, there's been a dramatic decline in the number of body shops in the UK, from around 14,000 to 7,000, and this reduction in numbers is continuing unabated. This fall, however, is not because the market has shrunk. In fact, it's grown. What we've seen is the withdrawal from the market, either by choice or by force of circumstance, of many small- to medium-sized shops. These, typically, have been underfunded businesses lacking the resources or the will to make the investments necessary in both capital equipment and training to meet the plethora of rules and regulations that now impact the body repair sector.

Also, the need to increase productivity has been paramount, particularly with the advent in the early '90s of courtesy cars in the UK repair market. This phenomenon came about when, in the teeth of a major recession, a number of body shops decided that a good way of differentiating their service from their competitors would be to provide "free" courtesy cars for the duration of the repair. At the same time, a plethora of unsold new cars was available, resulting from overproduction and the collapse of new car sales. In an attempt to move metal, many vehicle manufacturers were offering these cars on six- or 12-month lease packages at extremely attractive rates. Both motorists and insurers were delighted at the "no cost" provision of courtesy cars - and such was the success of the scheme that within a remarkably short space of time, they'd become well nigh universal.

The early '90s also saw dramatic changes to the insurers' Approved Repairer Network Programmes. Prior to this, "approved repairer" status meant very little other than the repairer agreed to give the insurer concerned a blanket discount on work carried out. There was no structure to these networks and no standard contracts. Some insurers had so-called networks of more than 1,000 repairers, and it wasn't unusual to see two or three body shops in the same street all "approved" by a single insurer.

Some order needed to be brought to this chaos, so one small but, at the time, influential insurer, Sphere Drake, set up a structured national network of repairers, all of whom signed a standard contract by which they agreed to abide by a series of service criteria (including the provision of a courtesy car for the duration of the repair) and to work for a standard labour rate. They also agreed to use manufacturers standard repair times and the Audatex (ADP in the United States) computerised estimating system to prepare estimates.

Sphere Drake sought out top-quality repairers and dangled the carrot of significant work volumes, based on the chosen repairers being given a defined exclusive territory. The concept worked well and, as had happened with courtesy cars, it soon got taken up by other insurers. Body shops, in the meantime, were delighted to climb aboard the approved repairer bandwagon, seduced by the prospect of rapid business growth.

As the volume of directed work grew (it's now around 85 percent of all insurance work in the UK), the scramble to get on one or another of the Approved Repairer Programmes intensified. Those body shops that were successful grew their businesses dramatically, whilst most of those that weren't either closed their doors or became marginalised as low-volume retail repairers.

Unfortunately, many of the "successful" shops that had acquired the coveted approved repairer status hadn't really done their sums. They grew dramatically but found that their profitability plummeted. The cost of equipping a body shop capable of high-volume output was (and is) significant. The need to provide courtesy cars had led to some bigger repairers running enormous courtesy car fleets with all the associated management and logistics problems. Today, the UK body repair market operates some 70,000 courtesy cars with some individual repairers running in excess of 100 vehicles. It's not difficult to imagine the problems involved in keeping track of all these cars, making sure they're in the right place at the right time, dealing with damaged or missing vehicles, and coping with the speeding fines and parking tickets acquired by their users.

Typically, labour rates paid to repairers in the UK are around £24 per hour ($36). This is based on standard repair times and the provision of courtesy cars, free collection and delivery, post-repair valeting and vehicle storage. In addition, insurers often will require that approved repairers give them a bottom line discount of 8 percent on the total bill.

As a result, body shop profitability has shrunk from a net average of around 10 percent to 1 or 2 percent of turnover, and our research indicates that around one-third of all body shops in the UK are actually running at a loss. Insurance companies have watched this but, with a few notable exceptions, have kept up or even increased the price pressure placed on repairers. Their philosophy has been that the market has been over-supplied and that they're driving out the inefficient. My response to this view is that far from driving out the inefficient, insurers are actually driving out the honest, as the only way to make money under some of these approved repairer contracts is to cheat the system.

If this paints a gloomy picture of the UK body repair market, some benefits have nevertheless emerged. The first is that, by force of circumstance, UK body repairers as a whole have become amongst the most efficient and productive in the world. Secondly, the necessity of providing free courtesy cars has forced them to minimise repair cycle time. Typically, this is now approximately five days from the point at which the damaged vehicle arrives in the repair shop and the point at which the repaired car is ready for delivery to the customer. I suspect that most American collision repairers would be delighted to achieve anywhere near this.

Why Insurers Bought UK Shops
So why, given the high level of competitiveness in the UK collision repair sector and its lack of profitability, have British insurers decided to open up their own repair facilities? From the discussions I've had with the insurers concerned, there are several reasons that, broadly, boil down to:

1. Their need to secure repair capacity in areas of the country where the insurer perceives a shortfall.
2. Their belief that the lack of body shop profitability isn't the result of too much competition but of operational inefficiencies, which a strong dose of insurance company management skills and financial clout will remedy.
3. To increase their own understanding of the repair process and as a stick, to pressure their existing approved repairer networks to keep their prices to a minimum.
4. To control and/or reduce repair costs through a combination of the above.

How UK Insurers Approach Shop Ownership
Have insurers been successful in achieving all, or even any, of the above? Before I answer that question, let us look at the different approaches used by those UK insurers currently operating in-house collision repair facilities.

• Direct Line - The company perhaps best known to the U.S. market is Direct Line, which revolutionised the motor insurance market at the beginning of the 1990s with its instant telephone quotes, dealing directly with the customer rather than a high street insurance broker. By focusing on a specific market sector (older, family-type motorists with clean licenses and a good accident record), they were able to significantly undercut their competitors and, within a remarkably short space of time, became the largest private car insurer in the UK.

In the mid-'90s when Direct Line announced that they were going to open a National Network of "Supershops," the rest of the insurance market took note. Having all lost market share as a result of not taking Direct Line seriously, the traditional insurers weren't about to make the same mistake when Direct Line moved into body shop ownership.

Insurance-owned body shops weren't a new phenomenon and, indeed, Guardian had taken over a successful Midlands body shop, Ladbroke Avon, in the 1980s with the stated intention of developing best-practice principles that could be rolled out to independent repairers working for Guardian. Unfortunately, the experiment was a failure and the shop closed.

Direct Line, however, having re-engineered the insurance side of the business, was set on doing the same thing to the repair sector. The repair sector, they said, was stifled by tradition and had failed to leverage the benefits of economies of scale. Their approach was to set up enormous (by UK standards) repair facilities of around 40,000 square feet, designed to "production line" the repair process. By operating a shift programme, increasing the specialisation of the productive staff, spending money on the latest capital equipment and using their buying power to maximise parts, paint, materials and consumables discounts, Direct Line believed they would move body shop productivity onto a new plane of efficiency. Eight of these supershops were planned, the sites purchased and the development put in hand.

Direct Line had two advantages. The first was that, unlike most other insurers, they didn't offer courtesy cars to their policyholders so they wouldn't have to get involved in the running of courtesy car fleets to satisfy demand. Secondly, like other UK insurers operating their own body shops, Direct Line benefited from a tax loophole that, in effect, gave them a net operational advantage of approximately 8 percent over an equivalent independent repairer.

Despite this, the Direct Line experiment in engineering the repair process cannot be said to have been a success. Of the eight sites originally planned, only six were opened. Two mothballed and eventually sold off, and two subsequently closed, leaving four shops operational today. It's some years since the company has shown their body shop operations as a separate division in their Annual Report and Accounts, but the last separate figures published showed an overall turnover of £13.2 million ($21 million) and an operational loss of £8.5 millions ($13.3 million).

At the time, Direct Line claimed that these were anticipated operational losses resulting from non-repeatable "start up" costs, but a superficial examination of their accounts showed that some 90 percent of their total turnover comprised direct costs. If their assertion that the losses were the result of start-up costs, then the overspend would surely have been in the overheads sector.

• Churchill - Churchill, another successful direct insurer (whose ultimate owner, Chiyoda in Japan, has Toyota as one of its major shareholders) took a different approach for their body shop programme, which was initiated in 1995.

They looked at existing independent body shop operations and produced an internal model of what they viewed to be the optimum operational size and best-practice processes.

As a result, all of the seven repair shops operated by Churchill are similar in size (16,000 to 17,000 square feet) and have exactly the same equipment and internal layout. According to Churchill's Engineering Services Manager, John Battley, the company's objective is not to make money out of their body shops, but to control repair costs and secure capacity in areas of the country where they feel vulnerable.

"We will only open new repair facilities should capacity shortfalls in other areas be identified," he says. "Each of our seven sites has a throughput of 90-plus repairs per week, giving a combined capacity of 18 to 19 percent of our total repair needs."

Training is another key issue for Churchill, and Battley recognises that for them, as well as the independent repair sector, there's a desperate need to pull through a new generation of young trainees.

"Ten percent of our operatives are apprentices," he says. "They are crucial to the future of our industry, and I'm pleased to say that since we started our apprentice programme in 1995, we have not lost a single apprentice to another employer."

(Perhaps the insurance sector could look at ways of helping body shops on the training front, maybe by funding apprentice training schemes.)

Another built-in advantage enjoyed by insurance-owned body repair shops is that, given that they'll only ever be processing a small proportion of their total crash repair commitments, they can be operated at 100 percent capacity right through the year, without the seasonal peaks and troughs experienced by the independent repair sector.

• Royal & Sun Alliance - Another major UK insurer to operate its own repair shops is Royal & Sun Alliance (RSA), which currently has a market share of around 10 percent in the motor sector. According to the company's Group Motor Engineers Manager, Trevor Davies, RSA's primary strategic objective was, like Churchill's, to secure repair capacity.

"The problem was that body shops were closing," says Davies. "Many were family businesses, which owned their own property, so with profitability down, it was better to close their doors and sell the site for development. We carried out an analysis based on our needs and industry capacity. We had a number of choices. We could do nothing and risk capacity shortfall; we could set up joint ventures with existing repairers, but there's a history of joint ventures not working; we could set up our own greenfield sites, but that would involve long lead times and the problems of recruiting the right staff; or, and this was our preferred option, we could buy existing businesses."

RSA's development manager, Richard Powinski backs up the story. "We have repair centres in Glasgow, Birmingham, Leeds and Luton, all of which we bought from the Lex Group, a national dealer group operating its own network of independent repairers," says Powinski. "All of the body shops we bought were where we had capacity issues. Each has a capacity of around 100 repairs per week, and we set up operational criteria based on our business models."

"Our in-house shops represent about 4 percent of our total capacity" says Davies. "And we have no plans to expand. We would only do so if the market was such that we could not get repair capacity. I think that we've learned a lot about repair methodology, processes and customer service. This doesn't show up in pound notes but has benefited customer retention. Our shops are not designed to make a profit. They're designed to pass on reduced repair costs and to reduce the overall cost of the claim."

I then asked Davies whether independent repairers should see insurance-owned body shops as a threat.

"I don't think repairers need to be concerned about insurer-owned body shops unless there are real capacity issues," he says. "Body shops with problems are the mid-sized operations - around 10,000 square feet - who aren't generating enough income to invest. The bigger shops who are keeping up with technology and making the investments necessary will be in a strong position whatever insurers do."

• CGNU - Another major insurer with a finger in the body shop pie is CGNU. But in this case, the initiative came not from the insurer, but from one of its approved repairers, a long-established family business, M & A Coachworks. The initiative has resulted in five Norwich Union-branded body shops called Solus, with a combined capacity of 18,000 repairs a year.

"Our family business, M & A, was doing more and more work for Norwich Union, but because we were also working for other insurers, we found we had to have a whole range of different estimating systems and operational practices in order to meet their different approved repairer requirements," says body shop head George Dionisiou. "We thought that if we could open a new body shop designed purely around the needs of one insurer, we could not only do away with multiple systems, but we could set up a body shop with a stable income stream working full capacity for 52 weeks of the year.

"We identified our ideal business model - with optimum volume and costs - and then approached Norwich Union. They were looking for ways to add value, increase customer service, secure repair capacity and build an understanding of the repair process. The basic principle of Solus came about in 1996, and we set up our first body shop in 1997.

"Contrary to most peoples perceptions, Norwich Union has a financial stake in our business. Their involvement has given them the opportunity to understand the repair process without the problems of ownership. They believe running body shops is not their core competency. The arrangement was that we would set up the facility, with Norwich Union branding, and work to a set of criteria jointly agreed. It's a true strategic alliance, not a joint venture. And although they have a non-executive director on our board, they do not interfere in the way that the business is run. The relationship is based on a robust business contract, which meets the needs of both parties.

"We operate open-book accounting principles and a complete cost transparency. They gave us an initial five-year contract, and this commitment gave us the opportunity to build the business. We're regarded by Norwich Union as their premier repair centres, and we're part of the Norwich Union culture. We're benchmarked against their Approved Repairer Network body shops, and NU is looking at how to make their repairers more profitable.

"We benefit from not having to negotiate individual repair costs with their engineers, and this eliminates interruption, duplication and has helped us to reduce repair cycle times. The relationship has been fantastic from the first day we started. It's been built on trust and verification, and we work closely together to look at improved volume management. We operate a shift system, and we have a courtesy car fleet of 400 vehicles across the five Solus body shops. I believe that the initiative has been a great success, both for us and for Norwich Union, who have recently signed up a new 15-year contract based on agreed performance benchmarks."

Four major insurers and four very different approaches. Other leading UK insurers, notably Cornhill and Zurich, have no plans to move into body shop ownership. According to Cornhill's Dane Loosely, "We believe that insurers should stick to insurance and leave body shop operations to those who know what they're doing."

Is It Working - and What Can the U.S. Market Learn?
So what are the implications of all this to the U.S. collision repair industry? Will you see a gradual takeover of the repair sector by motor insurers or is it a quick fix to the wrong problem?

Speaking at our recent International Bodyshop Industry Symposium - IBIS 2002 - David Worsfold, editor-in-chief of the UK's insurance magazine Insurance Post and a knowledgeable observer of the industry, accused insurers of arrogance, inefficiency and incompetence. Many of their problems, he said, stemmed from severe operational indigestion brought about by rapid consolidation of the insurance industry, at least in Europe. A multiplicity of internal software systems, usually incompatible, have created administrative chaos and, yet, instead of reviewing their own internal systems, insurers seemed intent upon the indiscriminate use of supply chain management to stem their losses. Instead of addressing inherent problems, in many cases, they simply tried to pass it down the line. "We have a problem and you are going to solve it for us. We want you to do more and we want to pay you less for doing it."

He went on to draw analogies with other industries, such as motor manufacture, where the philosophy of beating up suppliers had proven to be a failed philosophy.

My personal view is that insurers, by their very nature, are beaurocracies, while body shops, by their very nature, require total flexibility and the ability to react rapidly using experience rather than a system's manual to deal with each problem as it arises. In the long-term, I believe insurers will come to realise that the amount of management time involved and the bottom line benefits of body shop ownership simply do not add up.

I believe that greater savings can be made by insurers through developing genuine partnerships with repairers, perhaps on the lines of the apparently successful relationship between Norwich Union and Solus. Trust and transparency must be at the core of any such relationships if they are to work. One of the biggest cost elements of the overall claims cost is the process of thrashing out an agreed price for the repair. If we can learn anything from the CGNU/Solus set up, it's that there are large cost savings to be made if this element of the process can be dispensed with and replaced by random audits.

Should U.S. repairers be worried? In the long term, probably not. But insurers have deep pockets, and by the time they conclude that their executives' time and shareholders' money could be better spent elsewhere, there will undoubtedly have been casualties. Don't imagine that because, in most cases, repairers can "do it better" than insurers that there isn't considerable scope for improving your own efficiency. My advice? Focus on your own business. Look at any and every way of optimising your own performance, so you'll be in the best position to face - and beat - any competition, regardless from whence it comes.