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
