The insurers have a dilemma; they can’t raise their policy prices in California but must keep their profits up to keep their stockholders happy. They need to run a tight ship and find savings where ever possible. As owners, we also have a big dilemma – raising our prices to keep our profits up. So while insurers still think that cutting the cost on our end is a way to maintain their profits, we are continuing our downward spiral. 

Common sense tells us that if someone is selling a product that costs “X” amount of dollars to produce, with a consumer market that will only pay “X” amount of dollars for their product, then at some point the product would reach a cap on the amount of profit it would be able to produce. Without expanding their market by selling more of their product or by raising their prices, they must at some point reach the ceiling on their profits.

    Picture the insurance company as a business that sells apples. They just sold 1 million apples at a profit of 50 cents per apple, netting $500,000 dollars. Now if the apple company wants  to make $1 million, they would either have to sell twice as many apples – or make $1 profit per apple. Raising the price will price themselves out of the market. So, in the past, the approach has been to lower the cost of the apples they purchase by negotiating a better purchase price, creating larger profits.
    Now, imagine that the collision industry as the apple growers. We need to sell our apples, so we’ve lowered the price of our apples to where there is nothing left to give. Now our apples are being sold for less than it costs to produce them. Things have become so desperate that many have conceded to selling rotten apples to some insurers who are happy to buy them.
    As long as the price is right, insurers will try to pass it off as a good apple. When the policy holders realize that they received rotten apples, the insurers pass the blame over to the growers, saying they’re not our apples, we didn’t grow them.
    What has worked in the past for the insurance companies will no longer work in the future. They can no longer use the same cost cutting methods to guarantee their profits. As shop owners, we are desperate to hang on to what small profits we have left and can no longer concede to additional discounts. Times are changing and insurer’s profits will be something that will diminish unless they find another way to generate their increased profit. If we cut our quality and sell customers rotten apples, we will be the big losers.

Running lean
We hear about running “lean” and lean is good, but what is my purpose for going lean? I can only cut wages and processes so much until my product gets compromised. If I am running leaner, it should be to put more profit in my company, not to guarantee the insurer’s profits. At what point will the insurance companies realize that they have bottomed out; there is nothing left to cut. Maybe their profits have maxed out. I have heard it said that the insurance companies will continue to take and take until we say no. I believe this is true.
    In the past, insurers increased their profits by cutting their costs and moving many expenses over to our side. The DRP system today has saved insurers billions of dollars by reducing their cost attached with handling a claim by over 50%. DRPs are a good thing for insurers, but not always a good thing for the repair shop.
    There used to be two types of shops – those with DRPs and those that wanted them. Things are quite different now. Many top shops are becoming choosy with whom they do business. We will no longer cut our costs unreasonably or be forced to compromise the quality.
    Many shops are drawing the line as I have. If a shop continues to cut their quality to save the insurer money, at some point the customers will become unhappy. Then the insurer will take this opportunity to drop the shop from their program and it will be too late to salvage what little reputation they have left.