May 1, 2001 by Sam Malatesta, vice president marketing & insurance relations at
The journey of the automobile has come a long way. In 1769 Nicholas Joseph Cugnot and M. Brezin constructed the first recorded vehicle to move under its own power. This event sparked an awesome series of developments over the next several centuries, but evolution was slow. In fact, it was in 1893 when Henry Ford had his first engine running, but not until 1896 before he built and sold his first automobile. And the Model-T only recently celebrated its 90th anniversary.
There was a time when few people owned a car and most dreamed of just driving one. But the automobile made the transition from an elite group of owners to what is now a practical necessity for the masses. It was Ford’s pioneering spirit that made the automobile an affordable acquisition for the average person, by improving the efficiencies and changing the economics of the manufacturing business. The adoption by society of the automobile forced adjacent industries to emerge and respond to these newly created consumer demands – among them being collision repair and insurance.
The repair industry today
Today, collision repair is an approximately US$25 billion a year industry in North America. A 1999 KPMG study revealed that $2.8 billion of that resides in Canada, where there are over 8000 collision repair centers. Of these, over 50% record annual revenues less than $200,000 per year, which translates into fixing about two cars per week.
Reports indicate that in 1996 the Canadian collision repair industry was $3.8 billion in size. Even though frequency increased in 2000, vehicle technology, strict driving laws, and better road safety measures have contributed to decreasing the total amount of repairable vehicles in Canada in the past decade.
A recent McMaster University study of the industry in terms of “the product/service industry life cycle” shows the path leading up to this current state (See Chart 1). Based on this model, a product and/or a service industry experiences four distinct stages in the span of its life, starting with the introductory stage of market entry and high pricing, where the product has yet to be adopted by the masses. In the decline stage, products are typically priced as low as possible and product usage has penetrated a strong majority of the population. For the service industry, the maturity stage is characterized by an increase in consumer demands, strategic alliances, a focus on improving efficiencies for all stakeholders, and consolidation. It is in this phase of the business that problems that have plagued an industry for even decades start to be solved. This prompts new and unpredictable competitors to emerge.
Clearly, collision repair is a mature industry that has been shrinking in the past decade. The time is now here for the formation of alliances, consolidation (which is definitely beginning to characterize the industry) and a focus on efficiency and customer service.
The sources of revenue for the industry can be divided into three categories – insurance companies (58%), vehicle owners directly (38%) and other sources accounting for the remaining 4% (see Chart 2).
The auto insurance business is mature and growing. It is an internationally competitive environment, there is a focus on distribution effectiveness, and client retention is critical for the financial model to prosper. The top ten auto insurers in Canada have over 60% share of the market due mainly to consolidation efforts over the past several years.
Some strategic vendor partnerships are emerging. The goal of these partnerships is primarily to improve the value proposition to the consumer through excellent customer service and a quality repair. Through proper execution, partnerships will also lead to improved efficiencies and improved profitability to all stakeholders, including business partners and employees.
As for the consumer, they only realize the value of their insurance premium at the time of a claim. Unfortunately, they are typically “cranky” as a result of the incident that resulted in a claim. They are looking for fast, friendly service that will help them “restore their lives to order”. Because they are confused about insurance and often do not know what to do at the time of the claim, they are desperately looking for someone they trust to guide them through the claim. Whether or not they should report the claim is one of their most frequently asked questions. High deductibles have resulted in more vehicle owners paying the collision center directly for the repairs, and this likely leads to an increase in average severity for insurers. When a $1200 appraisal is presented to a customer with a $1000 deductible, chances are that they will pay for it directly.
The relationship between insurers and repairers has improved significantly over the past decade. The respective industries demonstrated their leadership and mutual commitment to the consumer by being early adopters of appraisal technology for the ultimate benefit of the consumer.
Cycle time, customer satisfaction indexing, and cost containment are three critical areas that measure success. The true measure of any strategic partnership is based on improving shareholder value. But, there are four overall trends emerging that will drive both the collision repair and insurance industries into the future. Firstly, a new employee profile in the collision repair center will evolve. Currently, these employees are among the most skilled trades people, working in a fast-paced environment where knowledge in engineering and technology has become a prerequisite before anyone starts a repair. Enrollment within the industry has decreased and this has caused some short term issues for shops. Long term, if this issue is not resolved it will become a crisis for the insurer and the repairer alike.
Secondly, the economics of the insurance industry must improve. The industry is by and large, inefficient. There is little consistency from one insurer repair program to the next, making it difficult for the collision repair center to standardize work instructions and operating procedures. Improving the operational model and the efficiencies of the collision repair center will lead to improvement in profitability for both the insurer and the repairer. A faster cycle time is a major consumer demand.
Thirdly, a “consumer focus” is increasingly needed to improve the image of the collision repair industry. The Canadian Collision Industry Forum (CCIF) is a collaborative approach where repairers, insurers and other sectors of the supply chain have come together to proactively address issues facing the industry in Canada. Industry image is a critical area of focus as a result of the poor perception the consumer has had for the collision repair industry in the past. The image of the industry will improve.
Lastly, a collaborative business model must be applied in order for the business to advance. The business model that determines future success must address specifically the needs of all stakeholders, starting with the consumer. The insurer’s needs must be met, along with the business partner’s needs. Insurer business partners include brokers, independent adjusters/appraisers, repairers, glass companies, car rental companies, etc., as well as the adjacent industries that service those business partners.
Insurer and business partner employees are an integral part of the business model’s success. Insurance company marketing, underwriting and claims departments will align their objectives to reflect the significant role of the entire claims experience in building the insurer’s brand in the future. In addition, repairers and rental companies will align their objectives to meet the needs of their shared customer. Throughout this time of change in both the insurance and collision repair industries, one business fundamental remains constant – meet the consumer’s demands.
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