Insurer and Shop ConsolidationPosted 11/16/2004
By Alexis Gross
Shop consolidation was a major concern for the collision industry in the late '90s and early in the 2000s, but with the general economic slowdown of the past few years, consolidators have encountered just as many woes as everyone else. However, the trend may be heating up again, with both insurers and shops. As evidenced by Liberty Mutual's recent purchase of Prudential's property/casualty arm, insurance carriers are buying up business in an attempt to gain market share.
"It's negotiate or be negotiated against," said Rod Enlow, CEO and principal of Renlow Auto Technical Consulting Inc. Insurers and shops are each competing for a limited number of customers. Both are doing everything they can to attract and retain them.
"Consolidation is too kind a word," he said. "Right now we have some serious overcapacity in the industry. We have more shops than cars to fix and a lot of empty service bays. More and more shops are losing their ability to stand on their own two feet and market their store on their own without relying on an insurance company steering business toward them."
Joe Sanders, president of J.L. Sanders Collision Repair Consulting, agreed that insurers have the power to make business happen.
"The insurance companies are finding they have more ability to drive a large volume of business, so there is an advantage to the insurer if they have more customers, more policies, in an area," he said. "If an insurer has a lot of clout, it has the ability to direct a large volume of work to one player or another."
This situation leads to one reason many insurers are consolidating, said Sanders.
"Take Liberty Mutual in a given market: They may not have enough policies in force to direct many cars, so their customers would be subject to normal market forces," he said. "But if the insurance company had a lot of policies in force, they can put more pressure on repairers on a referral list to meet their goals and standards."
Having a large volume of work to direct leads to a greater need for high-volume shops, said Sanders, as companies seek to reduce their loss-adjustment costs.
"If you're directing work to shops, and you've got three shops in an area that do 200 cars a month, you can have one adjuster work with those three shops and oversee 600 cars a month," he said. "If those 600 cars are going to 100 different shops, it will take three or four different adjusters to do the same amount of work."
Despite overcapacity in the collision industry, these men suggest that one way for shop owners to best plan for the future would be to increase their shop's capacity through larger stores and multiple locations.
It's a chicken-and-egg thing, said Dan Bailey, chief operating officer at CARSTAR Inc. and an ASA Collision Operations Committee member. Bailey noted that larger repair operations enable insurers to be more profitable, which will (hopefully) return to policyholders in the form of lower premiums. Larger operations, he said, will attract more customers and increase the insurer's market share, which will give them a larger volume of business to drive toward the shops they choose to work with, which will likely be the larger shops.
"It sounds strange since the business is rather slow right now, but if I were in there today, I would look for ways to get in more cars and get my (performance) numbers up," said Sanders. "Those who have the best performance numbers and the best capacity to grow are going to prosper when the business turns around, as it surely will."
In a future with fewer insurers, one thing shop owners should be careful of is too much business coming from one insurance company, said Bailey.
"If you lost 25 percent of your business overnight from bad judgment or a poor repair, and you lose your direct repair program (DRP), that would put you out. But that's easier than losing 45 or 50 percent of your business.
"You never know who's going to buy who, so make sure to do everything you can to have good relationships with everyone. Always try to improve your relationship with the insurance companies and provide their customers (which are also yours) with a level of quality that's the best in the industry," Bailey said. "The biggest thing the insurance company wants is policy retention, so the biggest thing you need to do is make sure the customer is happy with their insurance company so you can get referrals. It's a lot cheaper to get customers to renew their policy than it is to find new customers, so it's all about providing service and quality."
Increasing customer satisfaction is good for everyone involved, said Sanders.
"Insurers are continually raising the bar on the performance they expect out of repair shops. That includes consolidators, dealers, dealer groups and independents. They're all in the same boat," Sanders said. "Insurers are deciding now that they have the ability to direct volumes of work to a shop, they're measuring the shop's performance, and the shops that perform the best will get the most work. It's tough competition, but it is truly performance-based."
"Performance" in this case means average severity, which is the average dollar claim on the repair, cycle time, customer service index (CSI) score, and the percentage of the average ticket using alternative parts.
Sanders said that this is a good thing.
"I believe insurers continually want their customers' cars repaired correctly, and the only way they can measure that is CSI and post-repair inspections," he said. "For the last 20 years, we've been trying to get the insurance industry to tell us the rules of the game, and they never have. Now we know what the rules are because it's performance-based. Consolidation of the insurance industry means you better get your performance numbers up because they're going to demand it. But that's good because 15 years ago, we didn't know what the insurers wanted since every company had different rules."
Sanders said standards are tough, but there are people who are up to meeting them at all levels - consolidators, independents and dealers. "At least you know what you have to do. If you think you can do it, stay in there and make it work. If you can't, maybe you should find a new job," he said.
Enlow similarly predicts a tough future for collision shops that will separate the wheat from the chaff.
"We're going to come down to shop regulation or certification," predicts Enlow. "In a few years, shops that aren't properly equipped and trained are going to have to close their doors."
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