Approximately 6 minutes reading time
“Car repairs are going to get very expensive” was the headline in various Dutch media stories following the publication of a study by the British Thatcham Research into the future of car damage repair. Not only is that bad news for consumers who will have to dig deeper into their bank accounts, it is also very troubling for the damage repair sector. For the insurance sector, there is a danger it will become (even more of) a loss-making activity. But there is hope on the horizon.
To find out where the media got their story from, we have to go back to the beginning. Ever since Thatcham Research was founded in 1969, all the big insurance companies in the United Kingdom have used this research centre to carry out collective research into quality vehicle repairs and safety in the automotive industry. Extensive crash testing is carried out, for example, to make sure the safety systems function properly both before and after a repair. The findings of these tests and numerous other studies, for example into the effect of using a certain type of material, are then translated by Thatcham Research into repair specifications for repairers.
Over the years, these British repair specifications have also become more or less the industry standard for the Dutch market as well. Via Solera, an ICT organisation that supplies data to the automotive and insurance industry, hundreds of Dutch damage repair companies now buy the guidelines of Thatcham Research. The reason is simple: repairs carried out according to the standards of Thatcham Research, which is recognised as one of the leading research centres in Europe, cost only a fraction of repairs carried out according to the repair specifications of the car manufacturers themselves.
If repairs carried out according to these specifications are cheaper, then why will the cost of damage repairs go up? How is that possible? Cars are getting smarter, and the technology is becoming more sophisticated every day. The whole idea of this smart technology is to reduce the number of traffic accidents. But despite all the intelligent Advanced Driver Assistance Systems (ADAS) and Laser Imaging, Detection, and Ranging systems (LiDAR) that modern cars are fitted with, the cost of claims still continues to rise. Why? It’s caused by a combination of factors:
Cars are fitted with more and more high-tech gadgets and systems. To give just one example: nowadays your average wing mirror can be adjusted electronically, folded in, heated by remote control, and is fitted with blind corner sensors. In the past, it would only cost you €20 if you knocked a wing mirror off, but today a modern wing mirror can cost hundreds of euros to fix.
Mercedez-Benz is working on the development of Digital Light, a headlight system with millions of micromirros, that make it possible for the car to project driving instructions onto the road surface. With each headlight costing thousands of euros, the thought of hitting a pole if the parking sensor fails is enough to make you break out into a cold sweat.
Repairs will become increasingly more complicated for repairers because every car manufacturer has developed its own driver support and assistance systems. And because cars are getting more autonomous, the role of the driver will also change. Although the driver will still have final responsibility, the car itself will play a bigger role in safety on the road. This creates extra pressure for the manufacturers: any failures in the technical systems could cause a big dent in their reputation. To prevent this from happening, they will want more control over the way cars are serviced and repaired.
Car manufacturers will therefore set higher requirements for repairers if they want to become an approved repairer for a certain make of car. For example, employees will have to have a minimum level of knowledge about the technology of a car and the equipment and software used to carry out repairs.
In addition, the rapid pace of developments in such areas as autonomous driving and Connected Car technology mean that providers of training courses for car repair mechanics will have difficulty teaching the skills needed to fix modern cars. The lessons will be out of date, and it will be hard to get hold of enough practical material to keep up with the latest trends.
So if they want to keep getting work, repairers will basically have no other choice than to invest heavily in specially trained mechanics and expensive high-tech equipment. And that investment will then have to be earned back.
Even though all these new developments in the automotive sector will eventually reduce the number of car accidents, right now there are no hard facts to show that the number of accidents has fallen dramatically because of “smarter” cars. What is more, Statistics Netherlands (CBS), the Directorate-General for Public Works and Water Management (RWS), and the Institute for Road Safety Research (SWOV) (article in Dutch) have all concluded that the number of (fatal) accidents has actually gone up since 2014.
The biggest causes are the ever-increasing amount of traffic on the roads and people using their smartphones while driving. The technology might be getting smarter, but that doesn't mean the drivers are.
The average cost of claims, and thus the combined ratio, will be higher. Does this mean repairers will make more of a profit on repairs? On the contrary. BOVAG (report in Dutch) has calculated that the cost of parts has gone up, while the share of labour costs (where the biggest margins are) has gone down. The margins on parts have dropped considerably as well: whereas in 2008 it was still 25%, it had gone down to around 10-15% by 2018.
As explained earlier, repairs will become more expensive because more specialist knowledge (training or new personnel) and specific equipment will be needed. All these factors will put pressure on profitability in the sector.
For years now, as a result of fierce competition, insurers have been charging ridiculously low premiums for their car insurance products. After all, higher premiums mean lower scores on comparison websites, and that way you quickly price yourself out of the market. Consequently, with the steady decline in premiums and the ever-rising cost of damage repairs, insurers are now finding themselves in a stranglehold. Car insurance has already been a loss-making activity for many years, and it is only set to get worse.
Because insurance companies are the ones who have to pay for the cost of damage repairs, and therefore want to keep these costs as low as possible, assuring the quality and safety of repairs will be a major priority. It is therefore inevitable that insurers will also set higher requirements for damage repairers. For example, they can make it compulsory for repairs to be carried out in accordance with factory-approved specifications, which means repairers who are too expensive or who don't have the necessary expertise won’t get any work.
In addition, by making these kinds of arrangements insurers can create financial benefits for both themselves and their customers. At the end of the day, the quicker, better, and cheaper the damage can be repaired, the more financial benefits this will have for both the insurers and their customers. In theory, this should ultimately lead to an improvement in other areas as well, such as the quality of repairs, customer satisfaction, and process efficiency.
But there is more to this story. Traditionally, car insurance premiums have been calculated based on a combination of factors, such as the weight of the car, the catalogue price, and the postal code and age of the insured driver.
This means there is a growing disconnect between the old way of providing insurance based on traditional criteria and the damage sensitivity and higher repair costs of modern cars. Because if a car is totally autonomous and self-driving, then it won't make any difference if the driver is a 20-year-old student who lives in the centre of a big city, or a 40-year-old teacher who lives in a quiet rural village.
That puts insurers in a very difficult position. When cars are completely autonomous in the future, then unfortunately the traditional business model for car insurance will be a total write-off. Studies are already being carried out into various alternative types and forms of insurance (article in Dutch), but a clear answer hasn’t been found yet. So there is plenty work still to be done.
Although on the one hand the increasing use of advanced technology is pushing the cost of claims upwards, on the other hand it can also provide a solution for the transformation towards new, future-proof business models.
If you can’t beat them, join them. Gartner among others have pointed out that embracing technology in the form of automation and partnerships will be necessary to improve the efficiency of processes, to help reduce costs, and to achieve greater competitive advantages by offering better and more targeted customer service.
It is almost impossible for insurers to have any control over the rising cost of claims. What they can do, however, is keep their own costs down by taking advantage of these developments. Insurtechs that specialise in a specific area of automation or innovation were initially seen as a threat by insurers.
But times have changed, and so has the insurance sector. In “Insurance Trends 2019” PWC found that over the coming years insurers will be looking to develop partnerships that will enable them to create a healthy future for their businesses. In fact, no less than 84% were convinced that they will start working closely together with an insurtech within the next five years.
Because repairs will be more complex and insurers will place higher demands on repairers, most repairers will have to decide what they want to focus on. Investment might not always be possible (especially for smaller companies), and the margins for some repairs will be so small they won't be worth doing. With this in mind, switching to a different business model will become a more attractive option, such as specialising in a certain type of expertise, or sourcing in this expertise from other companies.
There are still plenty of possibilities in this area, because there are only a few platforms in the sector that bring together supply and demand. By forming partnerships with insurtechs, the insurers and the repairers can create a damage repair network so that every type of damage can be assessed and repaired end-to-end much quicker.
Ultimately, for consumers it all comes down to one thing: finding the quickest and cheapest repairer who can fix the damage properly and who offers superior customer service. That hyper-modern wing mirror worth €850 lying broken on the road has already caused them enough problems.