As an observer of the auto insurance industry, Brian Sullivan offers a unique perspective on what collision repairers can expect in the future. Among his predictions:
- A painful reduction in the number of collision repair shops;
- Continued efforts by insurers to control various aspects of the process; and,
- Changes in various insurers' market share as the "advertising war" continues.
"GEICO now spends more on advertising auto insurance than Budweiser does on beer," Sullivan said.
As the editor of the weekly "Auto Insurance Report" for the past 15 years, Sullivan said he is often asked to share his take on what insurance trends will mean for repairers. He was, for example, a keynote speaker at the International Autobody Congress and Exposition (NACE) in both 2000 and 2001. This spring, Sullivan shared his latest observations and predictions for the road ahead.
Consolidation. Sullivan admitted that a decade ago he was among those who "drank the Kool-Aid" and believed that the collision repair industry would be "rolled up" into a half-dozen national players that would dominate large portions of market share.
"Collision repair, though, turned out to be much more complicated than investors thought," he said. "I don't think at this point anybody is underestimating the complexity of the auto repair business."
The farther removed from the day-to-day operation an entrepreneurial shop owner becomes, Sullivan said, the harder it is to make "these incredibly complicated businesses" work successfully.
"We're going to see the current model for quite a while," he predicted. "Entrepreneurs owning one, two, three, six, or eight shops will continue to dominate this business. Multistate, 100-shop networks? Hard to do."
Overcapacity. Sullivan also said he believes that much of the challenges facing shops today are based on overcapacity, too many shops chasing too little work. "A lot of shop owners ask, 'Why are our brethren doing these dumb things? Why do they agree to these insurer demands that will drive them out of business?'" he said.
"There's too much capacity," he said. "A bunch of shops are going to drown. And in the moments just before they go under, they'll do anything to stay alive. So if they take on business where they're getting paid 90 cents on the dollar, you know that's stupid. But they're just about to drown and that sounds to them like something that might help."
Sullivan said he didn't know how many shops would have to close or how long that "shake-out" would take.
"I don't know if it's five years or 10 years. I know it's not 12 to 18 months; it's longer than that," he said. "But at some point, when we've shaken out some of this capacity, then it will get to a healthy balance where a quality shop can charge a premium for access to its capacity."
The "surviving" shops. Sullivan said some collision repairers won't like what he believes are the keys to being among the survivors during the coming years.
"I do think the most important thing is to say to yourself: The insurers are really in charge here of where the customers are going," he said. "Shops are fighting back and trying to get legislatures to stop things. But at the end of the day, the customer has a relationship with the insurer, and they don't have a relationship with the shop. And I just don't think this is something that shops can break.
"I'm not saying you shouldn't fight insurers who push for bad repairs," he added. "I'm just saying that you have to accept that on a broad strategic issue, the insurers control the customers and where they go."
Sullivan said a shop owner could also survive by going "up-market," by focusing on higher-end vehicles that other shops are not equipped or certified to work on with owners who are able to pay some or all of the repair costs. Lower-cost customer-pay work is another option.
"But if it makes you so furious that you have to deal with these insurer clowns, then I think you should probably do something else," he said, "because you have to deal with them. That is a fait accompli."
The other key to survival, Sullivan said, is to understand what insurers will be looking for in the coming years.
"You need to provide a high-quality, consistent and data-rich experience for the insurers," he said. "They don't just want the car fixed. They want to know how the car was fixed so they can understand it and manage it better. If you're doing that, you're going to keep your head above water."
Insurer market share. Auto insurers, Sullivan said, have enjoyed a nearly five-year string of unprecedented profits, a cycle unlike any others he's seen in the three decades he's been covering the insurance industry.
Insurers have also benefited, Sullivan said, from a reduction in the likelihood of juries to "fork over insurers' money easily." But there's also been a reduction in claims frequency. He said he believes that's because cars are safer, the baby boom generation is in its "safest driving years," and laws on teenage drivers are tougher. More recently, higher gas prices appear to have contributed to a first-ever drop in annual vehicle miles driven, he noted.
Sullivan said there has been a small uptick in claims frequency in recent quarters, but he thinks overall that any changes up or down will be from the current lower base of frequency.
But another key difference in this insurance cycle is what insurers have done in response to years of prosperity. In the past, Sullivan said, after two or three positive years, insurers have typically lowered premiums to attempt (often unsuccessfully) to gain market share. That hasn't happened this time. Insurers have instead plowed profits into record advertising spending.
"Just 10 years ago, insurers were spending $100 million or $200 million on advertising collectively," Sullivan said. "Now GEICO alone will spend that in a month."
That will really start to get interesting in the next 12-24 months, Sullivan said, because up until now, the advertising hasn't come at a time when consumers are most apt to shop for insurance. For the most part during this advertising boom, insurance premiums have been flat or declining, and personal incomes have been rising.
As those two trends now reverse, more consumers will be apt to change insurers, and that, Sullivan said, may result in some swings in market share for various insurers.
Various insurer models. Sullivan acknowledged that he was wrong when at NACE in 2000, he said he didn't think insurers would ever own shops. (The following year, Sullivan was a NACE follow-up speaker to Allstate's Chuck Paul, who described his company's acquisition of the Sterling Autobody chain.) But although he said he believes Sterling has been "a success in many ways" for Allstate, he doesn't see anyone following that insurer's lead.
It's a similar story with Progressive, Sullivan said. Yes, there have been some changes in top claims leadership at the insurer this year, but he said he hasn't otherwise seen much dissatisfaction within that insurer with its Concierge program, but neither does he see any insurer switching to that model.
With a few minor variations, such as GEICO placing its personnel inside its direct repair shops, Sullivan said he sees that the traditional DRP model appears to be the one that "has stuck" and that most insurers will use for the foreseeable future.
Management by numbers. "In the past, insurers were flying blind," Sullivan said. "They did not know what was going on in their business. It took months for claims data to flow, for loss data to flow, for their expense data to show up. But in this decade, the ability of insurers to see what's going on inside their business has risen exponentially."
That poses both a challenge and opportunity for collision repair shops, he said. For the strong performer, it will help reduce the odds of losing out because of a "good ol' boy" network.
"Insurers will really know which shops are delivering a high-quality, low-cost experience to their customers," Sullivan said.
The challenge, however, is that the data won't always be used in the shop's best interests. Most would agree, he said, that shops make higher profits on some aspects of the repair process which makes up for the aspects on which they lose money.
"But now more than ever, an insurer can do this analysis and say, for example, 'What we're paying you to paint the car is too high. We can tell. So we're going to pay you less,'" Sullivan said. "What they don't do is say, 'What we're paying you to manage the parts flow is too low and we're going to raise that.' As the insurers become more efficient in managing costs, they tend to squeeze out the profitable part that was subsidizing something else.
"Everyone knows there's fat in different parts of the claim," he said. "The problem is that fat is necessary to subsidize some other part that's underpaid. It's going to be painful. But the end of the day, the insurers need the shops to make money. So they don't want to drive you out of business. But it's going to be bumpy."