Multiple parts ordering systems makes collision repair centres inefficient: analyst

With investment returns dropping while loss ratios are staying constant, insurance carriers are looking to cut costs on auto repairs, an industry analyst told a room full of collision repair executives Saturday.

Matthew Ohrnstein, managing director of Irvine, Calif.-based Symphony Advisors LLC, presented a plethora of statistics on the auto industry at the Canadian Collision Industry Forum (CCIF) Jan. 26.

In his presentation, titled “The Collision Repair Industry: North American Landscape,” he talked about State Farm’s PartsTrader program, in which the shop orders parts online in some U.S. markets where its clients’ vehicles are being repaired.

“State Farm is one of 10 (carriers) that are looking at getting between the collision repairers and the supply chain, and for differing reasons,” Ohrnstein said. “Some because they’re in the software business, some because they want to have more visibility.”

Related story: Collision repair centres ‘caught in the middle’ between insurers, vehicle manufacturers

At the Toronto meeting, Ohrnstein asked audience members how many parts ordering systems they have, including those mandated by their insurers.

Seventeen per cent said they have five or more, 20% had four, 22% had three, 22% had two while only 19% of audience members said they had one parts procurement system. 

“This is an area where I get concerned, because the more processes that you have, the more costly it is to operate your business and the more inefficient you become,” Ohrnstein said. “What if the banking system had nine or 10 different ways to move money between banks, between countries, between accounts, instead of one way? What if the airline industry didn’t have a convention around how tickets for flights across different airlines get transacted? Think about all the other industries that have standards. We’re lacking that.”

But he explained to the audience why insurance carriers are looking to cut costs. While loss ratios (or the claims losses divided by premiums) in the P&C industry in Canada is about 0.76, this does not account for the cost of policy acquisition or administration, he said.

The loss ratio, when taking into account policy acquisition and administrative costs, has been around 100 since 2008, he said. While this was “terrific” when investment returns were above 10% per year, this is no longer the case.

“For every dollar in premiums in Canada that property and casualty insurers collect, they pay more than $1 out. So why do they press the collision repair, the glass repair and the rental car companies to contain costs? Well, that’s why.

“The idea that they want to put collision repairers out of business – it’s just not true.”

Ohrnstein also presented a table listing the market share for replacement parts from the vehicle manufacturers themselves, recyclers and after-market suppliers in the U.S. While the manufacturers have 63.2% market share, the after-market suppliers have about 16.1% in the U.S. and about 13% in Canada.

Recycled parts suppliers have about 13% market share in the U.S., he said, noting those suppliers get their parts from vehicles assessed as total losses.

While total losses account for about 17% of auto claims in Canada, many of these never get dismantled for recycled parts, he said.

“They get rebuilt and a huge percentage, somewhere around 40 or 50%, go offshore. They go to Eastern Europe, they go to South America, so you never get those parts back in. Now the insurance companies are getting a lot smarter about this. They know that they’re going to need to fix Honda Accords and Ford Tauruses and cars like that.”

Therefore, Ohrnstein said, some carriers are no longer taking the total loss vehicles to auctioneers but instead to firms who dismantle them, knowing the parts will be available for future repairs.

In North America, he said, about US$33 billion is spent every year on auto repair, but the insurance industry spends another US$20 billion per year on total losses.

He suggested the collision repair industry would benefit if consumers could be persuaded to repair vehicles that would otherwise be assessed as total losses.

“Think about a way through creative programs where you can take cars that are not physical total losses but are economic totals and let’s see if we can repair more of them,” he said. “A total loss is not good for the consumer, nor is it good for the (manufacturer) because there is a higher propensity for consumers to switch brands.”

Ohrnstein’s presentation included a chart showing the automotive market share of the top 10 carriers in Canada, which have a combined total of 77% of the market. Intact has 18.1%, TD Meloche Monnex has 9.5%, Aviva has 9.3%, State Farm has 7.4%, RSA has 6.2%, Desjardins has 6.1% and Wawanesa has 6%.

About 300 attended the forum, held at the Toronto Airport Marriott.  CCIF holds three meetings per year. Its next meeting is scheduled May 25 in St. John’s, Nfld. and the third is scheduled Sept. 28 in Edmonton.

Editor’s note: An earlier version of this article incorrectly reported that in State Farm’s PartsTrader Program, the “carrier” orders parts online. The article has been updated to report that the “shop” orders parts online.