Self-preference is cannibalizing the Canadian auto repair industry

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Cars are beautifully emblematic of the forces that are reshaping the economy.

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Key features that used to belong, such as heated seats, remote start, automatic high beam or even radio, are now subscription-based. Their components are increasingly produced by “original equipment manufacturers”, or OEMs, which limits consumers’ choice when it comes to making repairs. Car manufacturers currently own the data transmitted by vehicles, which also limits choice, as these vehicles can only be repaired by workshops that have access to the data. On top of all this, private equity firms have consolidated the auto repair industry, making it harder to find a better deal.

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Now this: Insurance companies are buying up auto repair shops in an effort to eliminate competition and put themselves in a position to exploit the same consumers they claim to be protecting. In similar cases, they enter into exclusive agreements with a network of collision repair companies. These are called “direct repair programs” and they are reshaping the auto repair market.

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In 2015, the insurance subsidiary of the Toronto-Dominion Bank opened its own stores and Intact Financial Corp. is now doing the same by buying RSA Insurance Group plc, further limiting consumer choice. Intact, Aviva plc and Desjardins Group consolidate the insurance industry in Canada, while groups like Carstar of Driven Brands Inc.; Boyd Group Services Inc.; and Mondo Fix Inc., owner of Speedy Auto Service and other brands, simultaneously combine auto body repair garages.

With insurance companies opening their own auto repair shops and private equity-backed groups such as Boyd seeing their shares plummet, it seems likely that more consolidation will occur; and as it is, consumer choice could essentially disappear.

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These direct links – filing an insurance claim and receiving an appraisal, getting a car repaired and possibly renting a car in the meantime – have been presented to consumers as a wonderful source of convenience. It’s also convenient for the insurance company, which generates more business from customers held hostage by their direct repair agreements.

This type of coercion is a form of “self-preference”. The analog in an online context would be that if you search for an item online, you can only buy the market version of that item, or you lose your ability to shop altogether. The market is similar to the vertical integration that “health maintenance organizations”, HMOs, are deploying in the United States, where individuals are not insured if they leave the HMO network to receive care.

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It seems that insurance companies have an inherent conflict of interest when they also own an auto body repair shop. As a result, they might be more likely to deny someone’s insurance claim, pay less, overcharge services, or reduce the quality of the repair. Think the suggestion that a repair shop would save money is going too far? The industry has also experienced significant regulatory setbacks; remember that Ontario College of Trades inspectors check less often, if at all, to see if technicians are properly licensed.

The innovation of direct repair insurance programs gives insurers greater market power, essentially allowing them to do away with the “gate rate”, a term used to describe the hourly rate charged by dealers on standardized units of maintenance work. This is hurting the trade as it will become increasingly difficult to find qualified technicians who see their pay cut under these direct arrangements. The average collision repair shop that participates in these agreements with insurers is likely to have a lower door rate than independent mechanics.

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Salaries are relevant because today’s vehicles are becoming increasingly difficult to repair and are not as easily usable due to their increased complexity and digitization. Parts are more specialized and vehicle warranties can perversely prevent easy or interchangeable repair. While an insurance policyholder may pay for OEM parts replacement endorsements, the insurance company may mandate the use of aftermarket and recycled parts in defiance of the manufacturer’s warranty; this could create a dissonance between what has been guaranteed for the policyholder and what the insurance company may order a body shop to use in order to save money and earn more on the repair.

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Another reason why salaries are relevant here is the power of prospective monopsonism of the estimating software used by insurers: Mitchell and Qapter (formerly Audatex). The influence of these platforms could grow to control the wages of auto repair jobs.

Direct repair insurance programs are potentially actionable schemes that allow insurers to bypass competition from independent repair shops that have their own expertise. Technicians have complained about the trend informally, but could face professional repercussions for speaking out. The Market Access Initiative in the United States has spoken to entrepreneurs and small business owners about competition concerns over the past few years – and independent business owners in many sectors fear retaliation from platforms. control or monopolistic competitors. A comparable commitment does not exist in Canada, but could come from the Canadian Federation of Independent Business.

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We may be fast approaching something of a bubble in the collision repair industry, which is suffering due to ongoing supply chain issues and skilled labor shortages. Insurance companies could mislead consumers, small business owners and workers through these programs and these stakeholders are increasingly on the wrong side of an asymmetric bargaining position in the markets.

Insurance companies seek to control the whole aspect of the claim in order to control how the money is dispersed. Perhaps government policy should prevent insurance companies from owning their own repair shops in order to preserve consumer autonomy. This would not be unprecedented, as legislation already prevents large drugstore chains from acquiring or granting exclusivity or preference to a generic drug manufacturer.

Although we have not yet explicitly determined whether this self-preferential behavior is anti-competitive in a digital context, the similarity between pharmacies and drugs and insurers and auto repair is striking. This practice cannibalizes the Canadian auto repair industry, leaving consumers at risk of being cheated. Soon we may not even be able to compare insurance rates. We can do better and we need to fix Canada’s competitive landscape.