Canadian Underwriter
Feature

Crash Course in Collision Claims


January 1, 2004   by Sam Malatesta


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Auto insurance has been a hot topic of discussion for most Canadian consumers, for better or worse. While much of the focus has been negative, this can also be an opportunity for the insurance and collision repair industries. Now that we have consumers’ attention, and they are ready to learn more, how will insurers differentiate their brands?

It has to start with the product. Studies have shown that the consumer perceives insurance to be a promise, for protection and peace of mind. It is therefore a “conceptual purchase” in that the consumer does not receive “instant gratification”. In fact, the consumer only sees the tangible value of insurance at the time of a claim (when their dented fender gets straightened, or when their flooded basement no longer has water in it). Seen in this light, the insurance industry’s true product is the “claims experience”.

Bearing this in mind, claims frequencies today are reaching record lows, and as a result fewer consumers are experiencing the value of insurance. And, for those consumers who have had several claims experiences, the cost of coverage (if at all available) is becoming out of reach. The outcome is that more consumers are paying directly for their collision repairs and bypassing the insurance company. In major jurisdictions throughout Canada, repairers that cooperate with the insurance industry in delivering repair services to consumers have reported that their “customer pay” business has tripled compared to prior years. Their average transaction is much higher, and in numerous cases customers are paying for repairs that can cost several thousands of dollars.

CLAIMS FULFILLMENT

On the other hand, significant rate increases have piqued the consumer’s awareness of the claims process and the implications of filing a claim. Consumers have a higher expectation of the claims process today. It only makes sense – they are paying more for it. For insurers, this is the chance to deliver the promise and the product. The consumer is looking for a claims process they can trust, which is completely integrated and easy to follow.

For most consumers, filing a claim can be quite confusing and time consuming. Therefore this presents a great opportunity for the insurer and its respective distribution channel to shine. Solid claims fulfillment programs that are consumer focused, timely and consistent at each point of customer contact, will pay dividends through predictability of outcome and high levels of policyholder satisfaction.

These market realities – increasing rates and increasing consumer expectations – have caused governments to attempt to address the issues with changing legislation. As a result, auto insurance has once again become a political platform. As an industry, there is opportunity in using collaborative business models whose objectives are to improve the efficiencies and the effectiveness of auto claims transactions.

SEVERITY ISSUES

Data from the Insurance Bureau of Canada (IBC) highlights the reality of auto claims activity since 1986 – increasing severity of claims, despite decreasing frequency (charts 1 through to 4 outline the trends in auto claims activity over time in Ontario, the Atlantic region and Alberta for the auto collision product alone).

While much has been made of the need to reduce healthcare costs relative to auto claims, clearly there is also much to be done to make the physical damage portion of the auto claims process more efficient. The decrease in frequency has been a result of several factors, not the least of which is a higher awareness of rate implications after a claim – consumers know that if they file a claim, they will pay the price on their next insurance renewal, a trend also borne out by customer pay rates.

However, the drop in frequency is also the result of positive forces, including better driver training, increased awareness about drinking and driving, and preventative technology reducing the probability of a collision (e.g. ABS brakes, the third brake light. etc). Severity has been increasing at a rate higher than inflation. Increased deductibles have been a contributing factor, because small claims have virtually disappeared from the claims process. A significant percentage of severity (about 45% of the total) directly relates to the purchase of parts for the repair of the vehicle. Clearly, these transactions are not being optimized.

MARKET DRIVERS

The implication of these market forces are significant for both insurers and collision repair shops. The following are key factors:

Stronger insurer brands. The consumer is going to expect a seamless claims process that exceeds their expectations. This is largely related to rate increases. The consumer will be seeking more value. Insurers who deliver the value at the time of a claim will be rewarded through brand loyalty.

Pre-arranged claims services. The consumer needs a simple, timely solution they can count on. Insurers will focus on increasing policyholder participation rates in their claims fulfillment programs, or preferred vendor arrangements. This will stabilize insurers’ purchasing power and overcome the drops in frequency they have been experiencing.

To deal with these changing needs, innovative supply chain solutions are required. The entire “auto claims economy” – those transactions that occur as a result of a motor vehicle collision – must become more efficient and effective for all stakeholders, especially the consumer. And collision claims data shows there is clearly an opportunity to improve the economics of the insurance industry and fulfill the needs of the consumer.