er relationships?”– Johnny Reyes, operations specialist, Pacific Collision Center, Inc., Placentia, Calif.
Question answered by: Charlie Barone
Among the greatest concerns of body shop owners in the United States is the possibility of a developing trend toward insurance company ownership of body shops.
While the advancement of the Sterling/Allstate venture appears to be rapid in terms of growth – 54 locations in 11 states to date – the good news is, Sterling Auto Body may be an anomaly in the industry. Duplicating its model would require a number of critical factors to converge on selected markets with respect to the numbers. For this reason, it appears that the identical arrangement is unlikely to be repeated by most of their competitors.
Despite speculation regarding what other insurers will – or won’t – do, the Sterling venture is said to be an unqualified success. So what’s that mean, exactly, for independent collision repairers?
Associations Take a Stand
The independent collision repair businesses’ response to the growing peril of insurance ownership of body shops is predictable. It presents such a compelling scenario to their customers with respect to market interference that the conclusions are obvious. In fact, every autobody trade association has issued a position statement in opposition to the concept on the grounds that insurance company ownership of body shops is noncompetitive and not consumer-friendly.
For example, the Society of Collision Repair Specialists (SCRS) issued the following position: SCRS does not support insurance company ownership of, nor [their] investment in, collision repair facilities. These actions raise serious concerns regarding the consumer’s right to freely select a collision repair facility, as well as the independent collision repairers’ ability to compete in a free and open marketplace.
The Automotive Service Association’s (ASA’s) position is this: ASA opposes insurance companies having a financial interest in automotive repair facilities and views such interest as being in direct conflict with the consumers’ right to choose. ASA has historically supported the consumers’ absolute, unequivocal right to choose a repair facility for a collision or mechanical repair.
While what the trade associations say is true about consumers’ rights to choose being impinged by a Sterling/Allstate combo, by and large, the industry has come to depend to a large extent on referrals from insurers – better known as steering. The association leaders, who’ve traditionally been friendly to the idea of DRP arrangements and the business it generates for them, seem to be getting a little of that old “be careful what you wish for because you just might get it”payback. DRPs essentially tested customer bases of the insurance companies and proved that customers will follow their leads – blindly.
Using Legislation to Halt Insurer Progress
In terms of formal opposition to shop ownership by insurers, legislative hurdles have been introduced – the first of which was created by California State Senator Jackie Spiers. Allstate/Sterling, however, effectively crushed her Senate Bill 1648 in the California Assembly. In hearings on the subject, Allstate made a frontal assault on independent body shops and cited the high rate of fraud in the industry. The logic they used was why would they defraud themselves?
In what appears to be a self-serving study paid for and commissioned by Allstate, their polling said that among the people questioned, their concerns were poor quality work, cheating and inflated pricing in autobody repair. The poll was conducted by COMsciences, Inc., a public relations and advertising firm based in California.
The COMsciences poll claimed that 87 percent believe the insurance industry should play a leadership role in combating industry fraud. “Senate Bill 1648 will deny California consumers the option of an additional, reliable, less expensive and superior repair option,”said Hank Barge, field vice president for California Allstate Insurance Company. “The bill is anti-consumer, anti-business and perpetuates the existing fraud in the state’s auto repair industry. California consumers should stand strong and voice their opposition to this measure.”
As if that study weren’t bad enough for independent shops in California, in a surprising move, the Board of Directors of The Latino Coalition (TLC) and the Hispanic Business Roundtable (HBR) joined the California Chamber of Commerce in its opposition of Spiers’ S.B. 1648.
“Proponents of this legislation say they are protecting small autobody businesses with this initiative,”said HBR President Mario Rodriguez. “However, a quick analysis of Allstate’s Sterling Auto Body Centers in other states shows that not a single existing autobody company closed its doors due to this competition – a competition which will directly benefit consumers with a reduction in cost and fraud.”
But the failure of S.B. 1648 didn’t stop Texas Senator John Carona from introducing very similar legislation, which is still pending. Carona’s office issued the following statement:
“The proposed legislation that Senator Carona is contemplating focuses on insurer-owned repair facilities rather than direct-repair agreements. Under current law, insurer interest in repair facilities is not regulated. A possible conflict of interest could arise if an insurer paid for a consumer’s repair work completed at an auto repair facility owned by the insurer. This conflict of interest could diminish protections afforded to the consumer. Specifically, if an insurer was made aware that a repair facility currently participating in a direct-repair agreement was delivering dissatisfactory service or involved in fraudulent activities, it could stop sending customers to the shop. But, what recourse would be available if the repair facility was owned, either in whole or in part, by the insurer?
“It may appear to be more cost effective/less expensive for the consumer to bring his vehicle to a repair facility that an insurer has an ownership interest in. However, the use of below-standard parts and other cost-cutting practices may end up costing the consumer more in the end, both monetarily and safety wise.
“This issue dealing with insurer-owned repair facilities was brought to the attention of the Senator by a small-business owner/constituent. This proposed legislation protects the consumer and both enables and fosters open and evenhanded competition within the auto repair industry.”
Can We Stop It?
If anything, the proliferation of the insurance-owned body shop has taught the collision repair industry a real lesson. Its willingness to allow insurers to steer their customers to them is coming at a cost. Now the property and casualty business knows what it can do.
Because there hasn’t been the kind of backlash among their customers that detractors had hoped for, Allstate can march a parade of policyholders before legislators to testify about their wonderful experiences. The challenge for the independent shops remains to prove them wrong.
Whether a coalition of body shop trade associations, their lawyers and a handful of post-repair inspectors can accumulate enough evidence of harm done to consumers remains to be seen. In my interviews with a number of industry activists in which I sought evidence of malfeasance by insurer-owned shops, I was given a lot of hearsay but little in the way of solid evidence of wrongdoing. While it’s clear that any repair organization has its good and bad days and that no shop is perfect, a compelling case against the insurance shops has yet to be made on the grounds that they deliberately hack up policyholders’ cars.
It just might be that the best hope of slowing the trend will be on legal grounds, which was something several persons implied in interviews for this story. On what grounds remains to be seen since few gave specifics. However, there’s certainly enough meat on the bone with respect to unfair competition, antitrust and violations of state regulations regarding referrals to make something stick. The sad part is that it appears not enough of the right people care. Writer Charlie Barone has been working in and around the body shop business for the last 27 years, having owned and managed several collision repair shops. He’s an ASE Master Certified technician, a licensed damage appraiser and has been writing technical, management and opinion pieces since 1993. Barone can be reached via e-mail at [email protected]
Insurance industry analyst Brian Sullivan discusses the odds of other insurers buying shops, whether legislation to stop the trend can pass and allegations that Sterling purposely doesn’t fix cars right.
by Charlie Barone
In an effort to gain a more in-depth feel for how the insurer-owned and operated body shop concept is viewed by decision-makers in the insurance industry, I spoke with Brian Sullivan, a well-regarded analyst in the property and casualty business. Here’s what he had to say:
On Insurer/Shop Involvement:
“I don’t think that Progressive or GEICO have the kind of concentration in marketplaces where they can do it. They could in selected markets where they have 25 percent of the cars, like in South Florida. Others could, like the Auto Club of Michigan – the largest insurer in that state.
“There’s another angle on this – investments like this are really just a way for them to buy access to capacity, which describes the Southern California Auto Club investment in Caliber. They use Caliber a lot, and they like what they get.
“You might see insurers invest in companies like them. If say, an ABRA or a Fix Auto or a Caliber is providing them with solutions in a certain market, you might see insurers fund expansions in other markets like Texas, which is really what Caliber’s using the [Auto Club] money for. If an insurer isn’t comfortable with the capacity, [it might say], ‘We need some help in Chicago. If we give you money, will you expand your network into Chicago?’
“That’s a more logical next step to me than the extension of the Sterling idea to a company like State Farm or Progressive. … I haven’t heard a peep from companies like Nationwide, but I can tell you that they’re all watching Sterling. I think everyone is surprised by their success – including Allstate.”
On Happy Customers:
“The initial approach was to reduce repair costs, [but] it’s a broadly held theory now that you can’t save a whole lot more on repair costs. So the solutions we’re seeing now are reducing friction costs and reducing cycle time. At the same time, they increase customer satisfaction. I think shops don’t fully appreciate just how important that is to the insurers. Happy customers make them money.
“The only way they make money in the insurance business is if they keep customers for a long time.”
It’s commonly held that an insurance policyholder becomes profitable for a company after three years – with no claims. If one has a $3,500 claim in year six, the payoff is naturally that much longer. The question you might ask, then, is whether an insurer still wants that customer. Says Sullivan: “They want that customer . An accident definitely makes you less desirable, but most of us have had an accident at some point. Because there are only so many of those customers with premium underwriting criteria – like the 45-year-old-male-with-two-kids-in-a-Volvo-wagon kinda guy.
“But a lot of claims are small – glass claims and the like. What’s interesting is that data shows that the happiest customers are those with claims. The happiest auto insurance customer is someone who had a small claim that was settled quickly and easily. That person is much happier than someone who never made a claim.”
On Legislation Preventing Insurer-Owned Shops:
But what about the other various pending state legislation, such as the Corona bill in Texas?
“The problem is they are anti-consumer,” says Sullivan. “The collision repair industry isn’t held in high regard. But journalists are at the very bottom of the pile, so I’m allowed to say these kinds of things. It’s not like the collision repair industry is considered a bastion of virtue. People generally think that the people who fix their cars will rip them off. The industry, if guilty of anything, is [guilty] for looking the other way when they knew their brethren weren’t doing the right thing. If the industry had done a better job of policing its own, they’d have a better case to make.
“When an insurer comes in and says they’re going to guarantee the repair, who does one trust – an insurer or Joe’s Fender and Wheel? Frankly, you’re going to believe in a company like Allstate. At the end of the day, consumers and legislators realize that shop owners are trying to hold back the tide.”
On Work Quality at Insurer-Owned Shops:
“One thing shop owners don’t understand is that Allstate [is not guilty of] systematically fixing cars improperly. [For example,] not blending for color match. Say [Joe’s Fender and Wheel] decided [they’re] going to cut corners and wanted to make it a matter of corporate policy, i.e. send a memo that they didn’t want to blend paint. If [they did] that, there’s no lawsuit there because it’s just one guy. But if Allstate makes a corporate policy to not do something [properly] and someone can prove it’s detrimental to the customer, that’s a class-action lawsuit waiting to happen. Based on this, there are actually more constraints on Allstate than there are on an independent shop.”
On Market Realignment:
In 1993, Sullivan formed Risk Information Inc. to produce specialized publications for the insurance industry. Also in 1993, he launched the weekly Auto Insurance Report and in 1994, the bi-weekly Property Insurance Report. A speaker’s bureau was added in 1997, and the Auto Insurance Report National Conference began in 1998.