The Case for Cash
by Marc Anderson
State Farm’s decision to stop waiving deductibles for repair and, as some are speculating, to increase deductibles as policies renew, leading eventually to its vacating the market, has a lot of people saying, “Good riddance.” It has others in a near state of panic.
All the talk at the NGA conference in Minneapolis in May was as though State Farm’s decision to pull out is a done deal. However, we met with Bob Bischoff, SF’s auto glass manager, during the conference and he was unequivocal that the insurance company would not be pulling out of the auto glass market. Take that for what it’s worth, but it is an excellent point on which to base future trust of State Farm pronouncements.
Even if State Farm does pull out of the market, I am not convinced the other insurers will follow suit. A European carrier made a similar move a few years ago, only to lose huge market share and reverse itself. The carrier announced it was no longer covering repairs, that it was raising deductibles and lowering premiums. Its competitors matched the reduced premiums, but did not eliminate repair or raise deductibles and took large market share away. It took the company years to recover from the blunder.
If State Farm does stop covering auto glass, and if all the other carriers follow suit, this will take several years; by then the auto glass market will be changed radically and fundamentally. While the transition will be traumatic for many because the industry has evolved from, and remains largely dependent on, carrier and agent referral, I think there are some upsides and that you would be less stressed in a cash market. To be clear, we are not advocating for a cash market. Here’s a discussion of what to expect if it comes to pass.
Repair and replacement would operate like other free cash markets. Those auto glass companies that have positioned themselves to market to the consumer will have all the business. There will be fewer jobs because some consumers will live with their damaged windshields longer, but that will be partially or totally offset because the networks will vanish. There are around 15 million auto glass jobs a year. LYNX and Safelite control the lion’s share of those, so as many as 9 million jobs would all go up for grabs.
As the replacement market converts to cash, the number of repairs will increase, but repair will succumb to price pressure. There will, however, be many marketing techniques which rely on a spontaneous decision by the car owner allowing for reasonable prices. The repair industry will quickly get a lot better at talking quality. The vast majority of shops already deliver quality, but just as with replacement, they could be better at talking quality.
While a segment of consumers will shop for replacement on price only, invoice amounts will not go down because the cost of marketing to the consumer is higher than marketing to agents—and it has to be covered. This higher marketing cost will become more of a barrier to entry. A good thing. To the degree that individuals throughout the industry continue to keep quality levels up, the majority of replacements will be done for $350 to $500.
Crank the Numbers
Approximately, 55 percent of the market is insurance work, 22 percent fleet work and 23 percent cash. State Farm gets about 1.4 to 1.5 million claims a year. About 400,000 to 500,000, or 30 percent, of those are repairs. In spite of what Bob Bischoff said, I think State Farm ‘drilled down’ into the numbers and surmises it will save $30 to $35 million by moving out of auto glass coverage—because we all know premiums will not be reduced proportionately.
State Farm didn’t need to spend the time looking at the numbers, because after everything is said and done, it is simply devaluing its policies and the company believes it will get away with that because 1) it has many insurance regulators in its back pocket, 2) because it has many state legislatures in its back pocket for the same reason, i.e., money talks, and, also, 3) because most consumers will never know their coverage was eliminated (until after their windshield is damaged) and of those who do, State Farm calculates not enough will switch carriers.
Reasons to Feel Good
Industry insiders differ on whether or not this decision will stick. If policyholders complain or shop for other carriers, State Farm will reverse direction fast.
We are a long way from knowing what State Farm and the other carriers will eventually do, so reserve judgment until that’s clear. No doubt, such a transition will be difficult, but when the smoke clears, I think there will be reasons to feel good.
If you get most of your jobs from agent or carrier referral, you have to be a member of the networks to keep them happy, but the very act of being in the networks is what gives them control of your prices and market share, i.e., your business.
The answer comes from NAGS—of all places. In defending its numbers, NAGS officials have always said, and rightfully so, they do not set prices. “If you don’t like the offers, don’t take them.” More to the point, when insurers cut prices, they cut to a dollar amount, not a percent off the benchmark. If the benchmarks were 3 points higher or 3 points lower, the insurers would still cut exactly to where they have cut.
The industry has for a long time been blaming NAGS, blaming the carriers, blaming the networks and with absolute certainty, all those entities deserve all the blame they have gotten, and more—especially the networks. But, the truth also is, no matter how much you don’t like hearing it, much of the responsibility lies with the auto glass industry for having a lower price for cash than for insurance and for advertising $200 rebates to the consumer. Industry shops also need to take responsibility for allowing themselves to be exclusively dependent on agent and carrier referral, for accepting flat labor rates, for accepting net priced part jobs that lose money, for staying on every network until falling prices have taken all the fun out of it and for not organizing and fighting back.
Most of us don’t like change. Understandable. But, those who are able to let go of the past and change are more likely to survive. Once you get yourself emotionally prepared that change is coming (and you might want to start doing that) the new environment in which you run your business will be far more satisfying than the one we are in now. In this one, we survive at the whim and mercy of the likes of Progressive, Safelite, and Allstate, which is truly oppressive. Any one of these companies can, has, and will jerk the rug out from under thousands of businesses, and each other, again and again.
At the IGA, we talk to 12 glass shop owners a day and not a single one of them says, “I love my job. I love this industry. I’m sending my three kids to Harvard.”
People feel stressed whenever they are not in control of their environment. You do not now have control of your prices. In a cash market, the person who owns the vehicle and will be paying at the time of service will be making the decision. If you adapt and can survive the transition to a consumer driven cash market, you gain control of your price and therefore your business. Your control flows from your willingness and ability to compete on quality, service and price.
If you believe there is any chance the insurance industry will vacate the market, you might begin now marketing to the consumer. Successful marketing to the consumer, in every industry, depends on the image or reputation of the name. That comes from coverage and penetration. Your message—repeated many times. You cannot switch overnight from carrier and agent referrals to a customer base where the consumer makes the decision. You will need name recognition. Consider starting a second company and begin now to market to the consumer. If you do this, there is no point in billing through the networks. Direct billers have higher margins.
Two companies, with common ownership, sharing some cost, which do not compete with each other on where they get their jobs, will make each more efficient.
State Farm will have to change laws in some states and get regulators’ permission in others. The industry could stick a wrench in the works, if the industry began now to organize. There are things the industry could do to foil this change to cash, which I won’t go into here, except to say there could be many states where the insurance industry could not win a fight to get the legislature to abandon the consumer protection requiring zero deductible.
Either way, the industry must move to codify standards. We cannot let those who would abandon quality and safety control price. All replacement jobs must, by law, be done to AGRSS standards. Repair must move swiftly to finish its standard. It is essential to build organizations which can communicate effectively with state legislatures and insurance commissioners to make quality and safety an enforceable and visible requirement of every technician.
Marc Anderson is executive director of the Independent Glass Association.
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