First, a reminder: National AutoBody Research is an independent, third-party research, technology, and consulting company that provides trusted, objective market-based labor rate data, and whose primary concerns are for the care, safety, and welfare of the crashed vehicle consumer.
NABR does not have a personal stake in the important issue of setting and raising prices (i.e. premiums or labor rates) for either the insurance or collision repair industry. However, as an independent observer, we see a double standard that exists between insurance companies and collision repairers about when and how much labor rates can be increased.
When we say “double standard,” we mean a rule or principle that is applied differently to different groups of people when it should be applied the same.
Why are labor rates a concern to NABR? For us, it all comes back to the proper care of the consumer. We believe labor rates are the “lifeblood” of the auto body shop. Without healthy labor rates, collision repairers are less able to generate sufficient profits to reinvest in people, training, equipment and certifications. Limited resources can adversely impact their skill and ability to repair today’s vehicles, which increasingly includes new technology, manufacturing techniques, and advanced materials. This in turn may seriously jeopardize consumer care and safety, which is irrefutably unacceptable.
Thus, NABR believes that it crucial that collision repairers raise rates when the demands of business conditions and sound economic standards merit the increases in order to maintain a sufficient and necessary profit. However, our research shows that as a group, collision repair rates often have not even kept up with the rate of inflation. At the same time, insurance companies’ premiums have continued to increase.
The obvious question is why are insurance premiums rising, while collision repair rates remain relatively stagnant (and in some cases even drop)? With insurance companies routinely charging higher premiums, why do they continually fight against collision repairers raising their rates? We suggest it is because there exists a double standard for raising rates that is followed by many insurance companies. I’ll illustrate this with an example involving Allstate Insurance.
From a recent article in the collision industry press, we’ve synthesized Allstate’s standards for raising insurance rates:
- Raise rates when profit margins aren’t acceptable
- Raise rates on a market-by-market basis
- Raise rates for an appropriate and acceptable return to investors
- Raise rates even when the inflation rate is 0
- Raise rates quickly when costs increase to recover those costs quickly
- Raise rates as long as necessary and as justified by market and economic factors
Overall, we find these principles to be very logical, acceptable, and consistent with many for-profit corporations. However, the analysis of these six standards begs a question: Why are collision repairers not provided the same prerogative to raise their labor rates by applying the same standards? Here is a clear case that a double standard exists. I will elaborate on a couple of these to further make the point.
1. Allstate raises rates when profit margins aren’t acceptable. Another recent article draws attention to Allstate’s four-part “comprehensive program” to improve margins. Among the areas of emphasis are cost trends causing Allstate to take a harder look at costly auto claims. Given increasing cost trends that Allstate and other insurers are experiencing in auto repairs, the insurer is making a heightened focus on both effectively and efficiently managing claim-loss costs, and leading to an increased denial of claims. Why? Because as is true in any business, as costs increase and rates remain the same, the result is an unacceptable decline in profit margins. Have collision repairers experienced any cost increases and profit erosion over the last several years? Of course! By the insurer’s own logic and behavior, they ought to accept repairers raising rates to earn acceptable, necessary, and sufficient profit margins, but in true double-standard fashion, they often don’t.
2. Allstate raises rates quickly when costs increase to recover those costs quickly. Auto claims displaying higher crash frequency and severity seem to be driving Allstate’s margin woes. “About a year ago, actually, the frequency and severity started to take off,” CEO Tom Wilson said. “… [And] when you have a rapid spike in costs like that, we need to obviously recover those costs quickly.” Here lies another Allstate double standard. Has any shop had a cost increase in their paint or materials recently? Of course! So by the insurers’ same logic and behavior, they ought to accept a shop raising their prices to recover these costs quickly and maintain profitability, but again in true double standard fashion, they often don’t.
But what profit margins should shops shoot for? What really should be the labor rate for their individual shop? If they experience a five percent increase in expenses, what new labor rates should they charge to keep profits even? What would minimum labor prices be for a shop if they just kept up with inflation over the last 10 years?
This is where the Variable Rate System (VRS) comes in. Through the VRS national database of market-based posted (or retail) labor rates (not discounted rates), key shop characteristics (such as training, equipment and certifications), a collection of pricing tools and exercises, and NABR consulting, shops can get a much better handle on their labor prices to help get paid what they’re worth. Shops that actively use the VRS in their business are having the most success collecting the right rates for their shop.
In the end, the VRS enables a win-win solution for all stakeholders. While it’s not a magic wand or an easy button, the VRS is a compelling, innovative solution to proper pricing in the collision repair industry and light years ahead of the double standard that exists today between insurers and collision repairers. Contact us and see for yourself.