Best friends: Auto-body shops, former symbols of mom-and-pop businesses, are evolving into streamlined networks and offering attractive cost solutions for auto insurers. (Property/Casualty).

Auto insurers and auto-body shops haven't always had the most symbiotic relationships, and often they have seemed to be at odds with each other. But because policyholders are likely to continue to generate claims--the percentage of vehicles involved in accidents rose to 17% last year--the relationship is one of necessity. Recently, the development of consolidators in the auto-body repair market has helped turn the adversarial association into a partnership.

Chuck Paul, vice president in the property/casualty claims service organization for Allstate, said both sides have seen growth and maturation in their relationship. "The growth is natural, because 92% of all auto repairs are insured work," Paul said. Insurers enjoy the more business-oriented, consistent outcomes that are generated by consolidators. John Kent, a senior claims consultant for State Farm, said the relationship between auto insurers and auto-body shops is vastly improved. "We've formed alliances, and through those we've learned about their concerns and problems," he said.

Consolidators are regional auto-body shop networks that offer a streamlined, standard approach to car repairs. The seven or eight large consolidators doing business in the United States represent the cutting edge in technology, expertise and customer service, which is their draw for insurers. Consolidators, with their attractively designed buildings sporting customer waiting rooms with leather couches and coffee machines, are replacing the image of the local, bare-bones auto-body shop. But despite growth in the past five years, consolidators still generate only $1 billion of the $27 billion auto-repair market, according to industry reports. The majority of auto-body shops remain independent operations.

Consolidators, like Sterling Collision Repair Centers and ABRA Auto Body & Glass, comprise about 3% of about 53,000 shops nationwide. Raffle Benjamin, president and chief executive officer of ABRA, said no consolidator has reached a national business scale yet. Benjamin's network of 68 facilities is located in 10 states in the Rocky Mountains, the Midwest and the Southeast. "Our relationship with insurers is excellent. They are looking to improve their loss-adjustment expenses and customer service and are becoming more and more comfortable with professionally managed organizations. Insurers now view us as professional vendors. That wasn't the case five years ago. It was hard to get an audience then," Benjamin said.

Investors also are looking kindly at the future of consolidators. Over the past seven months, ABRA and several competitors have attracted nearly $100 million in investment capital. ABRA recently raised $25 million from William Blair & Co. and National City Equity Partners. Benjamin said the investment will be used to develop acquisitions. ABRA plans to grow to 250 outlets in four years.

Kansas-based Carstar also received a "substantial" investment from Harbert Management Corp. late last year. The capital infusion is slated for funding of the company's strategic-growth initiatives and development of its information-management system. Zurich Financial Services Group, Keystone Inc. and the Interinsurance Exchange of the Automobile Club of Southern California recently purchased $40 million of Series E preferred stock of Caliber Collision Centers, a consolidator doing business in California and Texas.

Changing Focus

A healthier relationship between auto insurers and auto-body shops also supports the personal lines insurers' new approach to customer service that focuses on restoration, rather than issuing checks. As insurers assume the responsibility of a claim from beginning to end, their reputations become more deeply entwined with suppliers, such as auto-body shops.

But Brian Sullivan, editor and publisher of Auto Insurance Report, warned auto-body shop owners to learn how insurers approach business, because they will want to control the relationship. "Insurers are waking up and saying, 'We only have one chance to make our customers happy, and it's in a shop that we don't own, don't control and have no say over, and we're getting blamed when the bathrooms are dirty,'" Sullivan said in Collision Repair Industry Insight. "This is transforming the way they are looking at your business. You think they are trying to stick it to you. I'm saying they're trying to control you, because they're so scared of the downside of a bad repair experience."

The insurance industry is trying to control the experience, because auto-body business is so fragmented. Insurers are dealing with about 53,000 different auto-body shops nationwide, "with standards that are all over the ballpark in cycle time and damage assessment," said Allstate's Paul. One of the main benefits consolidators offer insurers is a reduction in the number of vendors a company has to deal with. That means insurers deal with more quality shops that strategically are on the same page as insurers and train their staff to work within the insurers' guidelines.

But consolidators also can offer solutions to insurers' increasingly severe problems that are eating away at profits. The increase is reflected in the industry's average adjusted loss ratio for auto physical damage for 2000, which rose to 68.4 from 1999's 64.4, according to A.M. Best Co. The largest auto insurer in the United States, State Farm, saw its adjusted loss ratio jump to 78.8 in 2000 from 70.3 in 1999. Auto physical damage accounts for 18% of insurers' premiums.

One of the expenses that inflate loss ratios is conducting back-row inspections of repaired vehicles. Auto insurers routinely send adjusters into shops to reinspect policyholders' vehicles to check the quality of repairs and to ensure that the work on the estimate is completed to the insurer's standards. But as a relationship between an insurer and a consolidator matures, the insurer becomes confident in the level of work being produced and reinspects fewer than 20% of repaired vehicles, Benjamin said.

The Select Service providers offer State Farm customers added-value services and uses inspectors to verify the repairs on a certain percentage of vehicles repaired in Select Service facilities.

Not all insurers agree that consolidators are the way to go. Progressive, the fourth-largest private-passenger auto insurer, still writes its own estimates for each damaged car and doesn't believe that uniform quality exists yet with consolidators. So it focuses its business on the consolidator's shops that are the best and has Progressive claims representatives visit the shops every day, said Steven Gellen, physical damage process leader for Progressive. "We still look at each shop on its own merits. We look at the quality of repairs and the ability to turn jobs around quickly. We're looking for good customer-service shops with qualified technicians," Gellen said.

Beginnings

Direct-repair programs, where insurers guide policyholders to certain shops to handle a claim, gave birth to consolidators while helping to raise the reputation of auto-body shops.

The insurers' philosophy behind the direct-repair programs--offering a guaranteed completion date for repairs and a written repair guarantee for workmanship through prescreened certified auto-body centers--created a set of standards to which shops could aspire. Insurers turned to local claims representatives to recommend shops that offered consistent quality service to be added to their direct-repair programs. They have to look locally, because there isn't any nationally known auto-body chain. "If a source existed like a Home Depot of auto repair a lot of insurers wouldn't be trying to create their own networks," Paul said.

Because collision repairers have high fixed costs--expensive equipment and highly paid mechanics--they have to operate at high capacity to make a profit. "We need insurer referrals and volume," Benjamin said. So consolidators actively worked on improving their businesses to align themselves with what insurers are looking for, while acquiring shops that fit in with the philosophy

State Farm's Kent said that as the insurer was rolling out the Select Service program, it called on field office employees to help identify the best service shops that would meet the criteria set for the added-value customer-service offering. The shops had to meet a certain financial grade and pass a certain number of repair audits in order to reach this level, Kent said.

About 88% of auto-body shops now participate in insurer-sponsored direct-repair programs, with 86% of auto-body shops participating in a State Farm direct-repair program; 39% in Allstate's; and 37% in Farmers Insurance Group program, according to Collision Repair Industry Insight. Only 1% of the 6.7 million estimates that flow through State Farm's office are handled through the Select Service program.

Next Step

Last May, Allstate's announcement of its purchase of consolidator Sterling Collision caused an uproar in both the auto insurance and collision-repair industries. Never before had an auto insurer directly bought a chain of auto-body shops. The auto-collision world cried foul, because it feared the purchase showed that insurers would be able to exert too much influence on the industry. At the same time, Credit Suisse First Boston insurance equity analyst Charles Gates said the acquisition raised the barrier to entry of new auto insurers and expansion of existing ones, while hastening the withdrawal of marginal players in the industry.

According to the Automotive Body Repair News, Paul told attendees at a recent auto-body repair industry convention that the Sterling acquisition was driven by consumers' demands for convenience. "With more than 3,500 shops, consistency is hard to achieve, and it's hard to add value. To add value, repairers and insurers must establish a repair network, and it doesn't have to be a win/lose proposition," Paul said.

In running Allstate's direct-repair program, no matter how close the relationship between the insurer and its auto-body shops became, there was always friction, Paul said, so a decision was made to make a change. "We knew we either had to enhance the preferred repair option by taking a cooperative or distribution approach. We looked at a lot of models and discovered the most value for Allstate policyholders was an outright acquisition," Paul said.

With the acquisition in place for almost a year, Allstate reports improved cycle time and lower costs. One of the first areas to be streamlined under the acquisition was the number of phone calls made between the Allstate claim rep and the repair center to move forward with the claim. After studying the communications between repair centers and claim reps, Allstate designed an information-sharing program. It reduced the number of callbacks, reducing by two days the average cycle time of a claim that usually takes 10 days, said John Edelen, assistant vice president for the property/casualty claims service organization for Allstate. The reduced cycle time means less money spent on rental cars, another component of loss ratios. Allstate also reduced its "heavy oversight" of repair work that flowed through the Sterling shops, because having the shops as part of Allstate meant incentives were more aligned.

Auto-body shop associations and some legislators, however, are throwing a wrench in insurers' plans to invest in or buy auto-body shops. A bill making it unlawful for an insurer to own an auto-body shop was introduced in California's state Senate in late February. The bill, sponsored by state Sen. Jackie Speier, chairwoman of the Senate insurance committee, also makes partial ownership or investment in an auto-body shop illegal.

Senate Bill 1648 was introduced at the request of the California Autobody Association. The association said Allstate's purchase of Sterling Collision last year and the investment in Caliber Collision by the Interinsurance Exchange of the Automobile Club of Southern California were the reasons for the introduction of the bill.

"Legislation making it illegal for Allstate to own Sterling Collision Centers is clearly anti-consumer," said Allstate's Edelen. "Ownership enables Allstate and Sterling to work closely together to streamline processes and reduce cycle time while providing customers with a high-quality repair option that is guaranteed. The rest is up to our customers. They continue to be free to choose who repairs their cars. We believe we've created a win-win-win situation--Allstate, Sterling and our customers all benefit."

A recent poll of association members showed overwhelmingly that they felt it was a conflict of interest for insurers to own auto-body shops, said David McClune, executive director of the California Autobody Association. "It's similar to having insurance companies owning the doctors in the medical profession," McClune said. The California Autobody Association reports that there are about 5,000 auto-body shops in California.

The bill would allow the insurer that has a current interest in a shop to divest itself within three years of the effective date. The bill's next step is to be assigned to a committee.

California is ranked No. 1 in direct premiums written for private-passenger auto insurance, with 11.2% of the market, according to A.M. Best Co. data. State Farm Group and Farmers Insurance Group are the top two writers of private-passenger auto in the state, with a combined 25% market share.

Edelen says Allstate's market research shows that 70% of customers would be interested in taking their vehicles to a shop that is aligned with an insurer. "That shows it's in the interest of the insurers to find a shop that supports the insurance brand," Edelen said.

RELATED ARTICLE: Fraud: The Ugly Side of the Relationship

Auto insurers lose millions of dollars each year to fraud committed by auto-body shops. A study by California's Bureau of Automotive Repair reports that fraud is committed 40% of the time by auto-body repair shops. Last September, MetLife Auto & Home recovered $2.9 million in a civil lawsuit in Massachusetts alleging auto insurance fraud. MetLife Auto & Home, the 14th-largest writer of private-passenger auto in the United States, won the judgment against five auto-body repair shops, 25 people and a former MetLife appraiser who conspired to inflate auto-repair appraisals or write appraisals for nonexistent damage.

Insurers are on the lookout for both hard and soft fraud, "Soft fraud is difficult to detect, but it happens a lot," said John Sargent, corporate manager for MetLife's special investigations unit. Soft fraud is when an auto-body shop is paid to replace a bumper that it repairs instead. Progressive Corp., the nation's fourth-largest private-passenger auto insurer, uses a special investigations unit to identify and prevent this type of fraud. "It's so prevalent, a lot think it's OK," said Steve Gellen, a physical damage process leader for Progressive.

In the MetLife Auto & Home fraud case, auto-body shops enhanced damages by smearing shoe polish on the damaged cars so that in photos sent to the insurance company, the cars looked like they had been sideswiped, Sargent said. The fraud incidents were uncovered by reinspecting repaired cars and comparing pictures of damaged autos to estimates. Sargent stressed the importance of the reinspection process following repairs, because it reduces the temptation to perpetrate fraud. The success of a fraud-detection program also lies in its human resources, he said. MetLife Auto & Home employs 50 people who work on the fraud-detection program.

California is taking an active role in detecting auto-body fraud. In 2001, the California Legislature established a pilot auto-repair reinspection program that is run through the Bureau of Automotive Repair. As of Dec. 31, 2001, the bureau had scheduled 585 vehicles for inspection, and of the 507 inspections completed, 43% of the vehicles showed evidence of fraud by an auto-body shop that billed for parts and/or labor that were not supplied. The fraudulent repairs averaged $586 per vehicle. In testimony to the California Senate Committee on Insurance in January, Acting Chief of the Bureau of Automotive Repair Patrick Dorals reported that the numbers were alarmingly high, especially since the auto-repair industry is aware of the potential of having a repaired vehicle reinspected by the bureau under the pilot program.