Collision Course

The Financial Services Commission of Ontario (FSCO) reported that medical assessment and remediation clinic costs have risen some 158% in the last five years. Much of that increase has been reported as fraudulent activity, with phony billings identified as one of the main causes driving up the price of consumer auto insurance premiums.

While that was happening, however, the price that insurers paid to repair a damaged vehicle had actually done the reverse. That price is now 1% lower, on an aggregate basis, than it was in 2004.

In the last eight years, collision repair shops have faced several obstacles. Hourly door labour rates have not kept pace with inflation. Most shops advise us that they are receiving from $52-56 per-hour payment rates from insurers (compared to most mechanical repair shops at over $80 per hour). Insurers can also use their marketplace dominance to simply ignore that labour rate posting.

One insurer then takes a further up to 5% “fee” from the cheque they send to the shop to pay for the completed repair.
If you compare these Ontario figures to Manitoba’s public insurer collision repair door labour rate of $66.69 per hour, you can see the difference in just the next province.  

Some insurers favor Direct Repair Programs (DRP). Here, collision repair shops have lowered their labour rates and offered other services in return for the hope of more insurance repair business volume.

Cost increases above the cost of inflation range from fuel surcharges to uniform and laundry bills to 5-8% price increases yearly in paint product purchases. In addition, there are often yearly additional equipment costs, increased demands for funds to meet regulatory compliance issues and increased retention of staff costs.

Insurer demands for extra unpaid work, photographs, imaging, paperwork, priority repairs and, in some cases, rental vehicle costs continue to burden shops with a greater financial load.

And then there are the cars themselves. Complexity of vehicle design, vehicle construction changes, new materials and compounds used to make the cars today require extra ongoing training. The increased use of electronics in vehicles means that the shop needs more repair and diagnostic equipment for proper and safe vehicle repair – but with little money to pay for this.

Meanwhile, insurance company parts procurement programs have made proper and safe vehicle repairs more difficult.  Shops fear that aggressive insurance-driven parts procurement will be the final “nail in the coffin” that eventually will reduce their profits to the point that the shop can no longer stay in business.

Shops are pulling out their collective hair with the frustrations of aggressive insurer parts procurement programs. Most think this is a process designed to drive down their profits to the level of a 10% handling fee, rather than their normal parts profit, and obligate them to provide that profit to insurers. The only profit left for shops today is in the parts they needed to repair the damaged vehicle – and that is now disappearing.

Shops that belong to insurer parts procurement programs must buy their parts from suppliers that they do not know, have no history with and often are not in their own area. Repair facilities often do not know when those parts will now show up on their doorstep, so repair scheduling and planning is difficult if not impossible. Parts dealers, understandably, are upset that their long time costumers are no longer allowed to buy from them, even though they can sell the same parts at the same price or cheaper and deliver immediately.

For example: A shop in Sault Ste. Marie is buying from a parts dealer across the road. On their insurer-driven parts procurement program, that shop is now forced to buy the same part from a dealer in Newmarket – even though it is the same price. An immediate parts delivery is replaced with a four to five day wait for hopefully the correct and undamaged part. 

Why? Because the insurance-approved selling dealer is providing an additional fee (up to 3%) off the price of the part to the insurer.  Meanwhile, some shops are also asked by the insurer to pay for vehicle rental costs while the vehicle is waiting for those distant parts.

Another example:  A shop has been buying for its favorite parts dealer for years and has obtained a 30% profit margin on the part.  Under a new insurer parts procurement program, the shop in this case still buys from the dealer, but its profit margin is now 27%, as the insurer takes the additional 3% as a fee.

In the past, when shops were faced with an insurer demanding aftermarket parts, they could “price match” and obtain Original Equipment Manufacturer parts that were crash-tested and designed for that car, for the same quoted price. Today, parts procurement software does not allow that to be available for the shop.

Shops that have electronic parts ordering systems are forced to use additional insurance company demanded parts ordering systems as well.  Those that want to continue to buy parts from their local supplier are told that they must now demand that the supplier pay the insurer a fee of 2% on ordered parts in order for that shop to continue to buy from them.  Some worry that they may be in violation of federal Competition Act requirements with that demand.

Today, shops find that the collision damage estimates they generate are now the property of the estimating company who can then sell them to other insurers and reporting agencies. Shops receive none of that income.   

Insurance parts procurement programs also demand that the shop allow a third party to take their  data each day from their computer  – without a strong guarantee that the information is not being used by other companies.  Shops are now faced with someone taking their computer data, and using it in the absence of any clear privacy policy.  Is it being used by a competitor? Shops worry that the private data on their computers from other insurers now may be in peril of being taken.

Other competing insurance carriers may not be happy with another insurance company’s contractor possibly accessing their insurance and claims data.

Shops may face a bleak future – if you deal with one insurance company, the other insurers will drop your DRP status or no longer deal with you, for fear of having their data taken.  That would destroy the business of many good repair facilities.
Add to the picture the decreasing number of motor vehicle collisions and claims and the eagerness of insurers to “total loss” vehicles and fewer shops will be able to survive. A guest at a January industry conference in Toronto envisioned that half of the collision repair shops in Canada will disappear within the next ten years.

So how can strong and competent collision repair shops survive and prosper? There are several strategies we are seeing used more frequently, which will likely become more prevalent in the years ahead. These include:
•     adding other shops and becoming a multiple shop operator — more cars, more efficiencies;
•     learning to change a shop’s outlook — what makes it different and how to “brand” those differences;
•     becoming an expert in a geographic area for electronics, specialty metals, manufacturer level repairs, specialty repairs, fleet and company repairs and customer-pay work;
•     being recognized as the employer of choice — employees are eager to stay and work at the shop;
•     recognizing the perils of aggressive insurance company parts procurement at the shop and being determined to ensure that the facility can continue to flourish.

John Norris is executive director of the Collision Industry Informati
on Assistance (CIIA) in Ontario.