Repairers make a considerable margin on their OE parts purchases. Traditionally, they have made more when using OE dealer parts than on any other part type. As a result, insurers asking them to use alternative parts* at a reduced price and margin for the repairer is not often well received, and understandably so. Why would you want to use a part that takes money out of your pocket?
But let’s just test the logic here from an insurer’s perspective and how incentivizing the repairer WILL increase uptake of alternative parts, and the benefits to all stakeholders of doing this – even the OEM’s!
I’ve written a bit on the benefits of the repairer and insurer working together to optimize the MIX of parts used in the repair process and notwithstanding that all parties need to do their bit to make this work (which will form part of future articles), much of the opportunity hinges on repairer incentives. The beauty is that by paying repairers more, the insurer will actually save money! In fact, it is this anomaly, this conflict in ‘logic’, that has challenged insurers over the years and to a degree I understand it. However, if the use of alternative parts does not grow, and the insurer simply pays the repairer more to use what they are already using, then in fact the cost of parts will increase.
THE SUCCESS STORY
Between 2004 and 2011, I was doing work with one of the major insurers in Australia. Recycled parts usage was low, less than 6% of the repair cost and this insurer wanted to increase usage and benefit from the overall cost savings that were forecast at $1 million for every 1% increase. The pricing model we developed incentivized repairers to use alternative recycled parts and delivered a saving of at least 25% of the OE list price every time a recycled part was used. We did the numbers and on paper the logic worked, the model was sound. The question was would repairers embrace the strategy and use more recycled parts? You could say it was the million-dollar question.
Within 6 months, recycled parts usage amongst the participating repairers doubled to over 12% and in some regions spiked to 24%. An extraordinary outcome - driven by the fact that there was a win in it for all participants.
But there were other benefits that came with this model:
We systemized the process to the point where the assessor/adjustor did not have to intervene at all
The repairer was enjoying the commercial benefits of the strategy that much that they could not get enough of these parts (of course we made it easy for the repairer to source quality parts, at the right price – but more on this in the next edition of the series)
Supplementary charges diminished and so too did calls from irate policyholders who were previously primed to question the use of anything but new parts.
Today, I am helping insurers review their current models and supporting their efforts to build new models to take them into a more sustainable future, all the while winning repairer’s support – YES contrary to many taking the traditional confrontational approach, we can all work together for mutual commercial benefit. So, let’s look at a simple example that demonstrates what I have said above. For the purpose of this I have assumed that:
The repairer currently enjoys a discount of say 25% off the list price (for some makes high for others maybe not, but a line in the sand).
The repairer charges the insurer the full list price when using the OE dealer part.
The OE list price for the example used is $1,000.
The price of the recycled alternative part is 45% of the OE list so $450 (this is a solid average).
Insurer incentivizes repairers to use recycled alternative parts by allowing a margin of 30% of OE list price.
This demonstrates how all stakeholders can benefit from a better parts mix and although the OE’s may feel that this will lead to less sales for them, it will lead to more repairable vehicles, which they will benefit most from. It is in everyone’s interest to achieve this outcome, including the consumer who ultimately pays for increased repair costs in the form of increased insurance premiums.
As I’ve stated in an earlier article, ‘What the industry has failed to recognise is that co-existence is not only possible, in fact, it is crucial to the future of the repair, insurance and parts industries. The MIX of parts in any repair is what we need to focus on.’ The above model incentivises all to participate in this future of commercial and environmental sustainability.
IMPACT OF VEHICLE TECHNOLOGY
Technology in vehicles is changing daily. Every day, we see articles in trade publications that talk to a new development that supersedes that which was released only months earlier. This is both exciting and at the same time problematic. As you can see, this vehicle has 213 computers, many of which are located in accident zones.
For the insurance industry, vehicle technology advancements are causing them some cost challenges as well as some uncertainty. It is requiring insurers to challenge traditional approaches to repairs and will drive significant changes to their legacy business models and most likely to their parts policies, which we are already seeing some large insurers acting on. This will require all stakeholders to better understand the future and play their part. Automotive recyclers have a significant role to play in this and will need to become more proactive (the subject of part 3 of the series).
At a presentation by CCC in September 2017, it was established that in the US:
Auto accident claims increased after the GFC and have now begun to stabilize with the expectation that, in time, it will trend down due to the collision avoidance technologies aboard new vehicles.
Although new technologies will take a few years to filter through, it is already evident that vehicle design changes are driving an increase in repair costs.
New vehicles are showing the largest repair cost increases.
There will be fewer but more expensive repairs.
Total losses as a % of total claims are increasing and reached 18.8% in the March 2017 quarter.
With every vehicle redesign or new series, the cost of many commonly used parts has also grown as per the below graph.
Insurers are now looking at their parts policies and how they can enable the use of quality, safe and where required, certified parts. This will include some high value, technology components that have been tested, scanned and certified for sale/use that would otherwise not have been possible without certification. In doing so, not only will insurers manage their costs better, they will by default grow the opportunity to incentivize repairers to use these parts and share in the commercial benefits.
You see, if we are able to use more recycled parts and certified parts, many vehicles that are currently deemed as uneconomical total losses will actually be repaired. This would be a wonderful outcome for repairers, insurers, automotive recyclers, alternative parts distributors and OEM’s. Again, another anomaly, right? How can the OEM’s benefit out of more alternative parts used on vehicles? Well, they make up the majority of parts used in the repair process and most probably will always, so they will therefore be the ones with most to gain out of enabling the repair of more vehicles rather than having them total loss.
Dialogue with insurers both locally and abroad, indicates both an appetite and genuine willingness to drive this type of change. The rising cost of repairs (the need), coupled with a clearer view of what is possible - the opportunity as depicted in the ‘Optimal Parts Mix’ diagram (the solution) - means that insurers will look to incentivize the use of alternative parts, be it recycled or certified.
In the next instalment of this series, I will look at the supply chain and the changes it needs to make to play its part in enabling the opportunity.
As always, I look forward to your comments and contact - I would be interested in your thoughts and ideas. Don't forget also to share it with your friends and associates and like me on Facebook/Linkedin.
* Alternative parts in the context of this article includes recycled and certified non OE.