Auto Physical Damage Claims: the Procurement Puzzle

Insurance companies buy millions of dollars each year in goods and services from vendors – auto collision repair centres, lawyers, adjusters and appraisers, for example – and there is an emerging recognition among some carriers that supplier “spend management” can be streamlined. The prominent players in this game are “procurement” professionals who are increasingly popping up on insurer staff lists, particularly for claims management. Can these specialists fit the pieces together in a service-intensive industry?

THE NEW ATTITUDE

Many terms and ‘buzzwords’ are used to describe trends making their way into the property and casualty insurance industry. You can add ‘procurement’ to the list. A fancy word for purchasing, procurement is well-entrenched in the manufacturing (think auto makers) and retail (Wal-Mart, Canadian Tire) sectors.

Some insurance companies clearly think that what’s good for the manufacturing/retail goose is also good for the service gander. Several of the Top 10 insurers (not surprisingly, those with UK or European parent companies) have created procurement teams in the last year or two to modernize their dealings with the supply chain, including the auto collision repair industry. Companies such as Aviva Canada, AXA Canada and Royal & SunAlliance Canada are in the early stages of experimenting with a more disciplined approach to vendor management.

“We have seen that two-thirds of the Top 10 insurers have formalized the role of procurement in the company,” says Greg Smith, vice president, national programs, Crawford & Company (Canada) Inc. “They have hired specialists in purchasing who have more business experience in purchasing than insurance, and they are bringing that discipline to the insurance company.”

WHAT IS PROCUREMENT?

Procurement represents a specialized approach to the buying process, an entire discipline with its own language of “strategic sourcing,” “catalogue management,” “e-procurement” and “fulfillment management.” These terms translate into many of the specific features that are beginning to characterize supply chain interaction: service level agreements, key performance indicators, standardized audits, scorecards, to name a few.

The main goal is to provide cost savings, while at the same time ensuring performance and quality in the goods and services a company purchases. Sometimes referred to as “spend management,” it is often characterized as a more rigorous and transparent method of selecting, managing and continuing relationships with vendors or suppliers.

What’s at stake for insurers is potentially significant savings on a crucial aspect of their operating costs – the loss dollar. “Up to 10% of loss costs can be saved via negotiated volume discounts and streamlined claims-procurement processing – without compromising customer service,” according to a report from Accenture entitled Transforming Procurement to Create a High-Performance Claims Organization. “That can translate into savings of up to $100 million per $1 billion in loss claims.”

While sometimes interpreted as a pure price play, several company representatives emphasize that procurement is ultimately focused on value and quality for repair and replacement to benefit the end customer.

“We wanted to create a team that would have the professional negotiating skills to go to our vendors and negotiate the best deals for us in terms of quality, service and price,” says Irene Bianchi, vice president, claims and corporate services, Royal & SunAlliance Canada, which started a formalized procurement process in 2006. “It is really those three things in that order: We want to be able to secure the best for our customers at the best possible price, so we can pass those savings along to customers.”

There has been a move towards bringing in people with these specialized skills, notes Greg Somerville, executive vice president, claims and reinsurance, Aviva Canada, which also recently introduced a procurement strategy. “From our perspective, we recognize we purchase many varied services in support of the claims adjudication process, with significant impact on the customer experience and our loss costs.”

Even with the focus on customer service, insurers still can’t quite escape the notion that procurement is simply a cost-squeeze on suppliers – particularly in the auto repair industry. Since privately-run insurers spend between $11 billion and $12 billion on incurred auto claims every year, this area is often the top service category for spend management.

“The bottom line is that they were all looking at this process as a way of containing costs on their end,” says Larry French, director of operations, Collision Solutions Network, a network of independently owned and operated collision repair facilities. “In all honesty, it seemed like the Canadian arms of those companies were not quite sure at the beginning (about procurement). In my opinion, it looks like they were given this agenda and told to carry it out. We got mixed reviews, to be honest, whether it was a good idea or not.”

Some think there may be more hype than reality regarding the trend of procurement in insurance. “The whole concept of managing spending is what they (insurers) are up to, but we happened to end up with a word (procurement) that wasn’t even used two years ago in the vocabulary of anyone in the collision repair business,” says Larry Jefferies, executive vice president, CARSTAR Canada, a network of 115 collision repairs shops across Canada. “If you take a performance-driven approach that has a long-term sustainable benefit to both parties, that is just good business. Simply asking for volume discounts is not sustainable. Unfortunately, procurement has ended up in the minds and vocabulary of the collision repair community as being about discounts.”

“Procurement and performance are the buzzwords on everyone’s lips these days,” says Lee Smith, director of refinish at PPG Canada Inc, which operates the CertifiedFirst Network of 168 collision repair centres nationally. “These concepts offer great hope, but are fraught equally with great risk. Recent studies show average net profitability for Canadian collision centres at 4%. Concessions tied to volume increases could mean some shops will simply go bankrupt faster.”

Certainly, vendor management on the auto repair side of the claims fence is not a new concept. Direct repair programs (DRPs), preferred shops and enhanced cycle time performance measurements have been in existence for the last 10-15 years. However, many believe that auto insurance claims and servicing can benefit from further streamlining.

“In terms of context, I think there has been supply chain and vendor management programs for some period of time in this industry,” Somerville says. “Procurement is a term that has found its way into our vocabulary, and some of those specialized skills are brought in to run some of those traditional vendor management programs. I think it is a bit of redefining and getting more specialized.”

Claims management seems ripe for the application of procurement disciplines to drive value, note Michael Costonis and Anu Sekhri, authors of the Accenture report. They say procurement on the claims management side can help lower indemnity spending through discounts and lower the processing cost of claims through streamlined interaction with the supply chain. “In fact, Accenture analysis suggests that leading-edge claims procurement practices can yield 5-10% savings on loss costs and upwards of 25% on processing costs for the average personal lines insurer.”

PROCUREMENT: EUROPEAN IMPORT

As a concept applicable to insurance, procurement emerged as a trend in the United Kingdom and Europe about five years ago. It has since slowly made its way into Canada. Jefferies says he became familiar with the insurance application of procurement strategies through the International Body Shop Industry Symposium annual conference in Switzerland. “About four o
r five years ago, European insurance companies, some of whom did business in Canada, presented where they were going,” he notes. “We were aware of a global trend towards taking what I would just call business and attaching it to procurement and spend management on claims.”

Somerville says the Canadian operations of Aviva learned some lessons in procurement from its head office. “We have leveraged off some of the learnings from our sister company in the U.K.,” he notes. “And one lesson is that if you build this a pure price or cost play, you are missing the value of managing a network of providers that can help deliver the right claims experience to your customers.”

The experience for Royal & SunAlliance of adapting procurement strategies to the Canadian market was similar, according to Bianchi. “We started talking to the U.K. in early 2006 about how can we get some of their expertise and channel it to the Canadian operation,” she explains. “That is when we started talking about developing our in-house procurement team.”

Greg Smith says Crawford & Company (Canada) was able to see how its sister company in the United Kingdom went through the procurement process. “They (procurement specialists) bring a whole new set of skills to the table that changes the nature of the discussions; in many cases, for the better,” he observes. “They see the importance of not necessarily the lowest price, but the best value for the insurance company.”

Many of the procurement employees in insurance companies today are non-insurance people. Instead, they are professionally trained purchasers qualified through groups such as the Purchasing Management Society of Canada (PMSC). This group issues a Certified Professional Purchaser (CPP) designation. “We have accredited individuals who all come from manufacturing. If you have a team of professional negotiators working on your contracts, you do tend to get a lot more attention,” Bianchi says.

ADVANTAGES OF PROCUREMENT

What these negotiators do is open up the selection process to the widest possible universe of vendors, something Accenture calls “strategic sourcing.” This involves investigating a broad selection of suppliers and then negotiating volume purchase contracts with those suppliers that offer the “best combination of price, delivery speed, reliability and processing integration.” Other methods, such as the online cataloguing of suppliers, as well as the ability to rapidly match goods and services to vendors, are also key aspects of the procurement approach.

The advantages of this approach can spell significant improvements in the claims management process, according to several sources. “We want to contract into consistent delivery of services, guaranteed quality repairs, building deeper relationships with service providers where you are leveraging your purchasing power,” Somerville says. “We look at it from the perspective of how we use these initiatives to ensure there is quality service providers who are interfacing with our clients. How do we build service level agreements that allow us to meet the expectations of customers when they have had a loss?”

Bianchi notes the recent emphasis on procurement has transformed the nature of relationships with its suppliers. “For a long time in the insurance industry, partnerships were purely relationship-based; when someone moved on who was crucial to the relationship, it often crumbled, ” she explains. “Now we have formalized, professionally-organized contracts that are a testament to our values. We want to be able to do business with people in a way that is very transparent; everyone knows the rules and everyone has an invitation to participate. It is really the best firm that comes out on top.”

From the vendor side, Greg Smith notes the process can be equally beneficial, though sometimes arduous, for suppliers as well. “It can be a gruelling process, but it is positive in the sense that there are good outcomes at the end of the day,” he says. “If you have a strong offering, it is good to be competing in a forum in which you get to plead your case for why you should be able to earn the business as opposed to getting into just a pricing exercise, or who bought the last lunch.”

Others agree. “We have built a network of high-quality collision repair centres, ” says Jefferies. “Right in our mission and mandate, we mention cycle time and cost containment; those are things we have been preaching since 1994. So it is music to our ears when someone wants to talk about performance.”

The benefit of having the procurement process is that it does cause vendors to take a more detailed look at their own operations, French notes. “We felt it was actually a positive in terms of looking at exactly what the processes were and whether there would be more advantages in getting more standardized operating procedures,” he says. “One of the key things about our network is we are constantly measuring our members in terms of performance. This may just act as an added impetus.”

Performance is the Holy Grail, Lee Smith says. “PPG has been a manufacturer for over 124 years and we clearly understand process improvement. Our goal is to get the industry to measure itself by a common definition with a common technology. [We want] the carriers to simply award claims on the basis of performance objectives and key performance indicators (KPI) in an apples-to-apples comparison regardless of whose banner they fly or what suppliers they are aligned with.”

According to the Accenture study, “The insurance claims process can benefit from the same efficiencies, controls and technological breakthroughs that have transformed the supply chains of manufacturers and retailers around the world. While the claims supply chain of an insurers is quite different from those of Nokia, Peugeot and Wal-Mart, the principles of effective supply-chain management apply nonetheless.”

DISADVANTAGES OF PROCUREMENT

The procurement picture is not a rosy one for all vendors, however. The emphasis on volume discounts clearly puts a squeeze on smaller auto repair shops and niche vendors who cannot afford the fee structures of certain service-level agreements. “The problem with the procurement process, in my opinion, is that everything has different variables attached to it in the service industry,” French says. “They (insurers) may ask us for a specific cycle time that may not be in our control at the repair end, or they may have some administrative problems they need to look at on the procurement end, as well. If there is going to be a long-term goal, we would have to make some type of agreement that we have to work on these things together.”

Jefferies concurs. He says one-sided relationships that don’t take into account the unique nature of service repairs have a short future in the vendor community. “We have supply agreements with most of the insurance companies in this country and we need to continue to do that in a way that is profitable for the repair industry, but we must also need to ensure that insurance companies are not paying for inefficiencies in the system. It is not black-and-white; there are grey areas. Every single repair done in a body shop is a craftsman-type job. There is a lot of subjectivity to the repair costs.”

Insurers recognize the need for sustainability in vendor relationships. “It is truly a two-way street,” Bianchi says. “You can’t bludgeon vendors. They provide something you need, so you have to come to terms where everyone wins. We want a situation where our insured gets the best product when they need something replaced or repaired.”

“Unless these relationships are built on a win-win proposition, they are not going to succeed,” Somerville adds.

Lee Smith notes there is room on all sides for introspection and improvement. “Insurers, shops and suppliers should each drive internal improvement through measurement, benchmarking and performance-related objectives and form alliances with like-minded partners. We think this is the win-win that will serv
e the Canadian industry well through thick and thin.”

FUTURE OF PROCUREMENT

Some of the obstacles to procurement may be internal issues for insurance companies, according to Accenture. In its report, the consulting firm argues that the main challenge may be “how to effectively put these procurement disciplines into operation in an environment [in which] the claims professional essentially acts as the procurement manager on a transaction-by-transaction basis, while dealing with an extremely diverse supplier landscape.” Accenture also cites the limitations “of legacy systems and typical claims applications that are not necessarily equipped for the job.”

Nevertheless, insurance companies that have started the procurement process are keen to expand it to suppliers well beyond auto collision repair. Procurement may also be applied to legal, adjusting and appraising services, to name a few. “We started doing it with our professional service suppliers, our lawyers, independent adjusters, appraisers, the legal community,” Bianchi says. “I thought they might not like this, but they have been extremely positive with it. We negotiate in good faith. We want to create strong partnerships that are business-based.”

In many cases, the procurement function of an insurance company is divided into direct spending (claims) and indirect spending (furniture, etc.) to ensure the same kind of rigour is used across operations, and to minimize so-called “maverick” purchasing.

What does the emerging embrace of formal procurement strategies mean for insurance companies’ bottom lines? Sources say it is too early to tell the specific payback in terms of loss ratios and expense reduction. At least one company, AXA, estimates its procurement plan could shave 1% off the company’s global combined ratio by 2008 (AXA Canada representatives declined to participate in this article).

The evolution of procurement may lie in the realization, by both insurers and vendors, that procurement is an opportunity not only to rein in costs, but to emphasize quality, value and long-term relationships. Will it be the next wave of supply chain management for the property and casualty insurance industry in Canada?

“I think this will become more prevalent in the marketplace,” Bianchi says. “I think as companies demand more transparency and shareholders demand real value, it will be the only way to go. This (procurement) ensures you have a full spectrum view of what is out there in the marketplace, and then it allows you to go out and choose the very best that you can afford.”

Some companies “may be stuck in the traditional thinking of supply chain management of 25 years ago,” Somerville concludes. “I think we are talking about the next level of engagement, recognizing that there are specialized skills that can be brought to bear to the management of these relationships. To me, it is just the next level of professionalism in managing the business services that we purchase.”