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Letter to the Editor

Where Do We Go From Here?

Keeping an eye on trends in the insurance industry can offer some clues for repairers looking to the future.

Disintermediation

If it is not a term you are familiar with, some observers of the collision industry think you will be in the coming decade.

In a nutshell, disintermediation means removing the middleman or intermediary. In the financial world, for example, it means removing funds from a bank (which would have invested them for you) in order to invest them yourself.

In the collision industry, GEICO is among the carriers taking out the middleman by selling direct to consumers rather than through agents. You could view what Allstate and Progressive are doing as disintermediation, essentially handling repairs for their customers either through shops they own or shops they choose for the insured.

Disintermediation is something that auto insurer analyst Brian Sullivan talked about during his recent annual conference for insurers; it is something he believes is likely to be a growing trend in the future. And Sullivan is not alone.

“I don’t always think Brian is right, but I think he’s right on this,” said Matt Ohrnstein, the former CEO of Caliber Collision Centers who now serves as managing director of Symphony Advisors, a California-based consulting firm focused on the automotive insurance and aftermarket.

As an example of how a market can dramatically change around those who might not be paying attention, Ohrnstein suggested thinking of yourself as a dairy farmer some years

ago. “You owned a farm, milked the cows, pasteurized it, put it in bottles, and had trucks deliver it to customers,” Ohrnstein said. “But if you believed that supermarket chains would never be the prevailing distribution system for milk, you’d have long been out of business.”

Sullivan and Ohrnstein said the way consumers, insurers, and shops interact is going through similar changes. Whether those riding the disintermediation trend will be winners may still be up for debate, but to bury your head in the sand and ignore it seems a sure way to go the way of the dairy farmer’s home delivery system.

Key Insurance Industry Trends

Speaking at an industry event recently, Ohrnstein said there are a number of inter-connected trends within the insurance industry that collision repairers should be aware of. They include:

Acquisitions and changing market share:

Although Sullivan’s data suggests State Farm remains the clear leader in terms of auto insurance market share with 17.5 percent in 2006, that is nearly two points lower than State Farm’s 19.3 percent share in 2002. Perhaps not coincidentally, Progressive, now the No. 3 largest auto insurer, saw its market share rise 1.8 percent to 7.4 percent over that same period. Allstate’s market share as the No. 2 carrier was at 11.2 percent last year, up from 10.6 percent in 2002.

But experiencing even more growth that Progressive has been No. 4 GEICO, whose 2006 market share of 6.8 percent is more than two points higher than it was in 2002. That left the next six largest carriers with virtually flat market share performance (Farmers, USAA, AIG, American Family) or declines (Nationwide and Liberty Mutual). Ohrnstein believes Progressive and GEICO are gaining ground in part because they focus on auto insurance far more exclusively than some of the other carriers who also sell more home owner’s insurance, for example. More than 80 percent of Progressive and GEICO’s business is auto insurance, compared to 60-some percent for Allstate, State Farm, and USAA.

But Ohrnstein also pointed out that the overall concentration of the auto insurance market has continued. These Top 10 auto insurers combined have 63.5 percent of the market, up from 61 percent five years ago. Nationwide’s acquisition of CNA and AIG’s acquisition of 21st Century just continue this trend. These types of acquisitions, Ohrnstein said, are something to which repairers should pay attention, because they can easily involve companies with which you do – or want to do – business.

The advertising blitz:

It is hard to miss the onslaught of geckos and cavemen on TV and other advertising media and there is a good reason for that. Insurance advertising spending is at a record high, $3.5 billion last year, about twice what it was annually in 1999 through 2002, and even half a billion more than it was in 2005. Allstate, Progressive, and Nationwide are each spending 2.2 percent of their private passenger auto insurance premium on advertising, and GEICO is spending a whopping 5.7 percent. By comparison, State Farm is spending 1.1 percent, perhaps why State Farm is losing market share.

Ohrnstein said this trend has implications for repairers.

“Insurance companies are really focused on building their brand,” he said. “So when the moment of truth occurs, the auto accident, and the consumer, through a direct repair program, ends up at a collision center, the insurance company wants to do everything it possibly can to hug that customer during the repair process so the customer will have a higher propensity to renew his or her insurance policy. So they’re not spending these [advertising] dollars and just letting their customers go off to any shop they choose. If they can direct them to a high-quality, professional, high-integrity repairer they prefer to do that.”

The financial performance cycle:

Ohrnstein said there is a cycle in the insurance market that repairers should understand – and be aware of exactly where within that cycle they are. Every six to nine years, he said, auto insurers go through a period of prosperity, where they are making good money. Last year set a new record, thanks to rising premiums, improved underwriting (“Insurers have become really good at putting the right price to the right risk, the right policy.”), low combined ratios (losses and administrative costs compared to premiums), and (at least in the case of the current strong performance) lower frequency (fewer claims) and improved claims processes.

But Ohrnstein said he believes the industry has reached the top of this cycle and what generally follows is a rush by insurers to gain market share through advertising and lowered premiums, both of which are beginning to happen.

In order to work to remain profitable during this part of the cycle, Ohrnstein said, insurers generally try to reduce loss adjustment expenses. By driving more business to fewer shops, for example, and using more data to manage those claims, they can try to reduce the number of people they need to oversee claims. Ohrnstein said in his view the increased data that insurers today can collect and use to manage claims can be positive for repairers because it allows repairers to be “scored and rewarded for performance based on objective data versus the old way, which was based on who you know, sort of the good ol’ boy network.”

And, he added, insurers during this part of the cycle may “tolerate a little creep upwards in severity in exchange” for the lower loss adjusting costs.

There can be other upsides for repairers during this portion of the cycle, Ohrnstein noted. Lower premiums may result in more people carrying insurance, he said, and can reduce the likelihood the insureds will raise their deductibles to save money, two trends that can lead to more damaged vehicles actually getting repaired.

Other Predictions

Two other unrelated trends bode well for collision repairers as well, according to Ohrnstein. Leasing of new automobiles, which virtually died as automakers offered rebates and zero-percent financing, has rebounded somewhat. Leased vehicles tend to get repaired. Also used car prices have firmed up somewhat, which could help stem the rising tide of total losses. Ohrnstein cautioned, however, that both these trends could be short-lived.

In terms of other predictions, Ohrnstein predicted a continued rebound in aftermarket parts usage since its 2000-2002 low following the State Farm lawsuit. According to CCC Information Services, non-OEM parts hit a high of 13.3 percent of all parts used in 1998, and sunk to 9.2 percent early in this decade. But it is back hovering around 12 percent, and Ohrnstein predicted that aftermarket parts could account for 20 percent of those being used within five or seven years.

The CCC data, incidentally, shows that recycled parts use has held steady at between 12 and 13 percent throughout the past decade, whereas OEM parts usage has hit a record low of 70 percent, down from 77 percent in 2000.

In response to disintermediation or any of the other trends he outlined, Ohrnstein pointed out that everyone involved in the Collision Repair Industry needs to be prepared to change in order to not be left behind. He quoted General Eric Shinseki, the chief of staff of the U.S. Army: “If you don't like change,” Shinseki once said, “you are going to like irrelevance even less.”   o

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