Once a time people with agreeable levels of cash would provide a service for those who would take to the seas, to ensure that no matter what happened to the vessel the owner of the cargo as well as the ship would not be out of pocket. From the very beginning it was a form of gambling, by assessing risk and pricing accordingly. Such agreements were made in coffee houses, on the street or in offices, but the agreement was sealed with “my word is my bond”. Today insurance is a multi-billion dollar enterprise that is of national as well as international significance. Whilst rarely mentioned in the same breath as banks, insurance company’s turnover is so immense it is enshrined in national law, in the same way banks appear to be international but really operate according to the laws of the country the particular operation is based in. Whilst it is possible to purchase insurance for almost anything – or anyone – it is usually on the basis that the vehicle is based in a particular country. Hence, like Apple, it is almost impossible to buy insurance – and motor insurance in particular – from anywhere in the world for use anywhere in the world.

Three facets….

Motor insurers comprise of at least three elements – the claims group, business operations and underwriting. The main parts most customers and body shops come across is the claims group, whose primary purpose is to honour “my word is my bond”, otherwise known as the policy contract between the company and the customer in the event of a claim. The claims group is thus defined by the amount of cash it spends, and naturally cost control is important.

In another place, and the underwriting group consider the profile of the person trying to purchase a contract, ranging from their occupation, address and age right through to the vehicle. Surprisingly the interaction between claims and underwriting is nominal, in that contracts are usually annual and thus require trend data rather than specific events, whereas claims build trend data only from specific claims.

Overarching this is the operation, which provides the essential company policies. For example, should the company only target those who own/operate agricultural machinery? Or trucks? Or only cargo? The deeper effect for motor insurance means the use of brokers (third parties employed to sell contracts and who may in turn bundle different contracts to provide a tailored product) or direct sale to the public.

The good old days

The 1960s in the UK were a golden era for the collision repair business, paint companies and insurance companies. The vehicles typically used a few steel alloys, most of which could be endlessly re-worked without loss of integrity. Why? Because the impact performance of most vehicles was at best nominal (with the notable exception of companies such as Mercedes-Benz, Volvo and Saab) and the world of personal injury claims was a distant dream for most. In addition, the main differentiator between the cheapest and most expensive vehicles relied on size, more expensive interior trim and additional external adornment – the core systems were mostly common in terms of type of technology.

In 1967 thanks to a few insurers taking money and not paying out anything, HM Government put a proposal to the UK motor insurers: show us how spiralling contract costs and questionable claims behaviour can be moderated or Law will be imposed. The ‘L’ word sent the agreeable “my word is my bond” merchants scurrying, with the result that the Association of British Insurers (ABI, based in the City of London) separated policy control from material cost control and set up a cost control organisation, the Motor Insurance Repair Research Centre (MIRRC). Famously an ABI employee was instructed to find premises for MIRRC rather quickly, drove his van on the motorway west of London and turned off to find Thatcham – hence MIRRC is more often known as ‘Thatcham’. The ABI and MIRRC were both ‘non-profit’ organisations, with representatives from all sorts of motor insurers but with no one having overall control.

HM Government were agreeably satisfied. Not all motor insurers were members of either the ABI or MIRRC, but most were. How agreeable.

Operationally the drive to reduce insurance company costs was relentless, mainly from the Capitalist principle of survival via generation of profit. Indeed, for many decades insurance companies made profits that were by any measure immense. Cost control for claims required expertise, which was not generated by the overriding demand for financial expertise. Thus expertise had to be ‘imported’, which mainly came from body shops.

For individual repairers’ the opportunity for a well-rewarded job working with a sector they knew all too well whilst delivering ‘value’ in a way that is quite alien from the activity of repairing vehicles was understandably tempting. Indeed, in the UK most repairers aspired to eventually own a bodyshop, own a paint distribution company, work for a motor insurance company or – the holy grail – work for MIRRC Thatcham.

Strong and stable

There were some important ‘ground rules’ established during this time. From an insurance company point of view, they ‘owned’ the contract and treated all activity associated with the contract as their own property. Note the ‘customer’ does not figure in this business model, since they are the by-product that just happens to have bought the contract. Further, the insurance company from a position of ‘ownership’ then judged what was important, what cost controls to use and not be afraid to challenge the vehicle manufacturers.

Crucially it was a legal obligation to pay all taxes, have an annual vehicle inspection and have motor insurance to use any road vehicle in the UK.

The vehicle manufacturers build vehicles to sell based on objective measures (price, performance, economy, load capacity) whilst motor insurers used mostly objective measures of risk with a topping of subjective opinion. The approach shares the same words, but the meaning of those words is almost entirely different. The result is suspicion and distrust.

Remember – where the technology base is stable, the approach of motor insurance companies to ‘own’ the business can and did work.

Time to leave

At least three things happened to change the business landscape for ever:

– Globally engineered vehicles built by global manufacturers for global sale. This required at least one of the innovations below to come into reality, but it allowed production of vehicles to be switched from country to country in order to hedge against the effects of exchange rates.

– Mass communication. Initially this was via the Internet, but now is expanding via mobile devices. Suddenly companies found they could do all sorts of business all over the world at any time of the day or night, and then… The customers (i.e., people who pay for things) found they could do the same. All markets became connected in a few clicks, so an ‘emerging’ market could see the latest vehicles and know that the national importer was flogging previous generation designs.

– Vehicle technology moves faster in 10 years than the previous 110 years. Like the revolutions above, nothing is stable, everything is up for grabs and entire new systems have appeared (StopStart, hybrid/EV drive, lane keeping, autonomous braking, torque vectoring, GPS based gear shift planning and much, much more). That revolution went hand in hand with two big pushes – vehicle emissions and vehicle safety. The result was initial weight gain of circa 200kg by 2005, only for that to be reversed by 2015 with no loss of vehicle safety. To achieve that a greater variety of higher strength steel alloys along with non-ferrous materials have been used in vehicle body structures.

Not one vehicle system has been immune from technology revolution. Not even tyres.

However, the vehicle manufacturer world is also unstable, leading to endless joint ventures/manufacturing agreements as their powerbase moves towards the originators of that technology, their suppliers. That in turn means trading in ‘commodities’, which are the core controllers and software of each system. Because there is frequently no standard for how such systems work apart from the way they communicate with each other – and that means the whole vehicle is literally ‘alive’ – repair procedures can be changed if a different supplier is used for the electronic stability control (ESC), for example.

The road crash? Some – quite a lot – of motor insurers behave as if it is the 1960s. They are endlessly told of the technology marvels, fail to appreciate the commodities are immature, and so fail to appreciate that repair is more model specific than ever before. Quite simply, motor insurers don’t ‘own’ the vehicle any more.

Take the shirt off my back

Motor insurance companies have their own revolution to contend with too. Firstly, the person who pays for the contract will rarely stay with a company for more than one term, since most know that the reward for loyalty is to pay for the new customer ‘discount’. Secondly the connected vehicle (enabled by the US and Europe) allows impact events to be flagged to the vehicle manufacturer within milliseconds of the event, and unless the motor insurer is part of that contractual arrangement, they won’t know a thing until the bill arrives. Finally, thanks to connectivity, there is the possibility to risk price in real time, thus by-passing anyone calling themselves an ‘underwriter’. Underwriting is going to be automated sooner rather than later. In modern speak, it’s called ‘disruptive technology’.

For the employees of motor insurance companies, the wheels have well and truly come off the wagon.

It’s time to re-think how the business is done.

Vehicle manufacturers, like motor insurers, spent years telling their suppliers that the product was theirs and theirs alone. Survival forced them to realise that years of selling off key technology research to their suppliers shifted the power, to the extent that we have seen Fiat-Chrysler Automobiles offer build capacity to Google on the off chance they could get some additional vehicles for their factories. The automotive industry has mostly woken up and stopped talking about ‘command’, but the damage has been significant for some very large companies to the point that they may not exist in 10 years’ time.

Motor insurance companies need to wake up. Here the ‘motor engineer’ has been mostly purged with the result that the insurers struggle to understand the implications of the technology storm, and complain as costs soar. Some companies have migrated the entire repair process to the body shops, including the engineering, on the understanding that if the repairs mess up they will lose the insurer’s business. Less hassle, more money, more trust. It really works.

The days of a motor insurance representative coming along to a bodyshop to oversee what is already been overseen have gone. It isn’t clever or efficient. Equally endless on-line key performance indicators (KPI) dressed up as surveys are tools which need to be used in a less clumsy way. The body shop is not in a call centre environment, and does need monitoring, but there are systems already in use even in the UK that show the whole process can be focused without the distraction of jumping through endless pointless hoops. Motor insurers are really, really good at managing financial risk in the context of a known vehicle type with a certain type of user operating in a certain area. Vehicle manufacturers don’t yet recognise this but need motor insurers to help their customers use their products. A body shop repairs. A motor insurer manages financial risk. Together they are awesome.

Auto Industry Consulting is an independent provider of technical information to the global collision repair industry. Products include EziMethods, our online collision repair methods system and Auto Industry Insider, our collision repair industry technical information website. For more information please visit the websites: www.ezimethods.com and www.autoindustryinsider.com or contact ben.cardy@autoindustryconsulting.com