The headline price of refinish paint has risen for a number of reasons: the price of oil, manufacturing and transportation costs, securing global, technical approvals and, of course, commercial agreements.
The cost of refinish paint is even of interest to man of the moment, Jack Straw, who told Insurance Times that paint deals are one of the industry’s ‘several dirty little secrets’. Jack said, ‘One of the consequences is that the cost of paint has gone up. This is very good for the paint manufacturer and it’s not bad for the people that take the kickback, but it’s not good for the public interest’.
It’s these commercial agreements, mandated paint deals, rebates and referral fees that are found kicking around the paint manufacturer/insurer/work provider/distributor market that the OFT is interested in.
The OFT is conducting a market-wide consideration of both competition and consumer issues, for an ‘overview of regulatory and other economic drivers in the market and consumer and business behaviour’. Possible outcomes of market studies include: a market investigation reference to the Competition Commission (CC), enforcement action by the OFT, recommendations for changes in laws and regulations, recommendations to regulators, self-regulatory bodies and others to consider changes to their rules, campaigns to promote consumer education and awareness, or a clean bill of health.
To provide a bit of context...
Back in September 2011, the OFT issued a call for evidence to try to understand the facts about and reasons behind reported rises in motor insurance premiums (of as much as 40%).
The OFT wants to establish if it’s time for legislators to step in to improve the way the market works. The OFT is demanding the ‘full facts’, the reasons behind any increase and whether there are any consumer or competition issues that need to be addressed to improve the functioning of the market.
The OFT asked insurers and others for their views on a number of aspects of the private motor insurance market that may raise competition or consumer issues, including insurance companies’ use of ‘panels of approved repairers’.
Now for the interesting bit
On 14 December, the OFT published a summary of the responses it received and, at the same time, announced the launch of a market study into motor insurance, focusing on the provision of third party vehicle repairs and credit hire vehicles.
Interestingly, the OFT’s evidence came from 32 bodyshops, 16 UK motor insurers, seven price comparison websites, three credit hire companies and six trade bodies.
The evidence the OFT gathered suggested that premiums paid in the UK rose by around 12% between 2009 and 2010, and by a further nine per cent in the first three quarters of 2011. Responses received by the OFT indicated that a key factor in these increases has been a rise in the costs associated with personal injury claims. However, the increased cost of third party non-injury claims, which include credit hire replacement vehicles and third party vehicle repairs, are also factors which have had a notable impact.
So, the OFT suspects that there are features of the UK’s private motor insurance market that ‘restrict and distort competition’ relating to the provision of third party vehicle repairs and credit hire vehicles.
Refinish paint even gets a special mention in the OFT’s published summary of responses, which details the specific concerns raised about repairer networks.
The OFT said:
‘We have been informed that such an inflation of third party repair costs can happen in various ways. We have received evidence which suggests that certain private motor insurance companies, accident management companies and vehicle manufacturers mandate which paint and parts brands and distributors an approved repairer should use, and the price at which these should be sold to them.
‘In exchange, the private motor insurer, accident management company or manufacturer receives a referral fee from those suppliers. We have also heard that the price of paint has increased significantly in recent years* which may potentially be in part due to the use of such agreements.’
*According to data collected by Audatex, as reported in the Insurance Times article Cashing in on subrogation, 1 December 2011 (p16), the average cost of paint used in repair jobs has increased by 66.2 per cent between 2003 and 2011 from £148 to £246.
After speaking to several distributors, the general view was that they would, of course, provide the necessary evidence of ‘fair dealings and contracts’. At this stage a select number of distribution businesses have been contacted by the OFT with draft questions. It is understood that numerous work providers have also been contacted by the OFT with a request for similar information.
The general consensus is that distribution is not making an ‘unreasonable’ profit and that rebates or referral fees for mandated paint deals are paid by distribution out of these profits – in other words, it’s not the actions of distributors that inflate costs. It was suggested that, with average repair costs representing less than a quarter of the average overall claims costs, it would be wiser to examine the legal and administrative end of claims costs.
Andrew Moring commented on behalf of Morelli Group: ‘We will fully cooperate with the OFT providing whatever information they require to assist them with their investigation. However, we anticipate they will be able to draw on sufficient industry expertise to ensure that the study directs itself towards the key areas of concern and that they are not sidetracked by the sheer volume of information that their questions will elicit if not phrased correctly, and that this information is correctly interpreted by people with the right knowledge and background.’
The OFT states:
‘The market for the supply of private motor insurance encompasses credit vehicle hire organisations, repairers and other businesses providing services to drivers who have been involved in an accident; businesses that manage the provision of these services; and businesses that are involved in providing goods or services that are used by these service providers and those who refer work to these service providers.’
Sonya Branch, OFT senior director of services, infrastructure and public markets, said, ‘Our call for evidence has enabled us to gather information swiftly and efficiently so that we can now focus on specific features of the market that we are concerned could be restricting or distorting competition.
‘Our concerns relate to the provision of third party vehicle repairs and credit hire replacement vehicles to claimants, where we suspect companies may be competing to extract money from each other rather than keeping premiums as low as possible and providing car owners with value for money. By carrying out a market study, we aim to clarify whether a market investigation reference to the Competition Commission is appropriate.’
A spokesperson for the OFT said, ‘As part of our market study, we have now sent out draft information requests to a number of parties. We expect to publish our report in Spring 2012 before we consult on whether or not to make a market investigation reference to the Competition Commission.’
In the meantime, while the industry eagerly awaits the OFT’s report, what else does 2012 have in store for distribution? Smaller distributors will go bust, repair costs will be driven down further and those in the supply chain will need to prove their worth, according to Graham O’Neill, Owen Stafford and Andrew Moring.
‘There really is no place for a single fixed distribution model for the car body repair sector, certainly not in the current market where margins at all levels of the supply chain are being squeezed.
‘The ACIS model is designed to encompass the entire supply chain and focus on adding value for all parties, from the work provider right through to the bodyshop and its customers. But to do that, we have to be constantly horizon-scanning and anticipating change, then adapting in readiness.
‘Our model is constantly evolving. The market will remain very competitive and any distributor working to a fixed model, especially if they have been doing it for a number of years, will find that it is no longer sustainable.
‘We will see a significant number of the smaller distributors going as a result.
‘Consolidation into a smaller number of larger distributors is inevitable, I think. That should be good for bodyshops, as the larger distributors and organisations such as ACIS will have the technical knowledge and the portfolio of services to provide wide-ranging business support, which is no longer forthcoming from any other source.
‘The approach we are striving for is summed up in a fantastic comment from ice hockey legend Wayne Gretzky: ‘I skate to where the puck is going to be, not where it has been,’ he said.’
Graham O’Neill, ACIS Ltd.
‘Key to any successful business is to anticipate your customers’ requirements in the future and deliver on their expectations. So for any distribution model to be fit for purpose in 2012 it should already have been evolving and shaping its business to adapt and change to the marketplace.
‘To continue to play a major role in the future, distribution has to be lean, remain agile and constantly look for opportunities to reduce cost while adding greater value and ramping up customer service. Ultimately, there are deals to be done but they have to produce an end result that benefits all parties concerned.
‘Effective distribution will continue to rise to the challenge of filling the gap where manufacturer technical resource has been removed and excelling in creating innovative programmes that are driven by the downward pressure on price, the need to ensure full compliance and the constant requirement to reduce the cost of repair.’
Owen Stafford, iris
‘The current distribution model in the UK is undergoing the seismic shift that analysts have been predicting for many years. The market has been over-serviced with many small owner/driver distributors still surviving despite tough trading conditions. However, the last year has seen the demise of many of these smaller family businesses together with mergers and acquisitions and, of course, the loss of Hex Holdings.
‘This has meant that the market is mirroring the changes in the accident repair market, with the polarisation into strong regional distributors and two national distributors, Morelli Group and Brown Brothers.
‘Whilst the distribution consortiums still exist, we have seen the restructure of UPD and changes in the structure of NIBS and ACIS as their members change. Any additional entity within the supply chain invariably adds cost, a luxury in the current climate few can afford without clear tangible benefits. Whether these groups have a long term future as many of their members grow geographically and become discontent with their previous confines remains to be seen. Many believe that the added management tier of the central administration and sales functions in these groups adds costs in a market that is already experiencing extreme pressure on margins.
‘As this margin squeeze increases, members must begin to question the value of such arrangements if they fail to see a return in their contributions in increased business or work provision for their customers especially when they have multiple distributor associations.
‘We have been able to assist our customers in the last few years by attracting work provision contracts that provided steady work streams, but as claims volumes fall we have to adapt and continually look for more creative ways of helping bodyshops to survive these challenging conditions.
‘I believe that the current distribution model in the UK is in transition and that we will see many more changes and business failures during 2012, both in distribution and in bodyshops. However, I firmly believe that Morelli Group has taken the right steps to ensure that we will be in the good shape to meet these challenges and remain one step ahead of the market wherever possible, and this
is demonstrated by the steady growth we have seen over the last
12 months.’
Andrew Moring, Morelli