Tag Archives: auto

Geospatial Data: New Key on Auto

The whole transportation sector is in for massive transformation. The way that people and goods will be moved from point A to point B in the future will be completely different. I am not (yet) talking about a Star Trek-style transporter, although scientists have moved matter at the atomic level from one side of a room to another, so we may eventually get there.

The transformation I want to focus on is much closer. Consider the future that the young children of today may experience. They may never own a car, or understand what it means to hail a taxi, or even rent a car. The next generation will find it odd that we used to put “gas” in our vehicles and may think of driving a vehicle as something that you do in an amusement park. Imagine the future at Disney World, standing in a long line waiting for the new “1978 Camaro ride.”

See also: Connected Vehicles Can Improve Claims  

When you consider the impact of telematics, electric vehicles, the sharing economy, autonomous vehicles and new modes of transportation – like the Hyperloop or the fleet of drone taxis that Dubai plans to have in operation by 2020 – you start to see that these developments are not just science fiction. They are becoming science reality.

Collectively, these technologies and trends have the potential to dramatically reduce accidents, improve safety and optimize vehicle usage, which are great benefits for society as a whole. For insurers, however, this is a mixed blessing. Insurers have always been some of the biggest proponents of technologies that improve the safety of vehicles. But the potential to dramatically reduce accidents also comes with the probability of dramatically reduced premiums – the bread and butter of many P&C insurance companies (for both personal auto and commercial fleets).

SMA’s view is that these key trends in the transportation segment – telematics, autonomous, electric, the sharing economy, safety tech and new modes of transportation – will converge around 2030 to create a completely new environment. But the transformation has already begun. Telematics is already gaining traction. Uber and Lyft are examples of the sharing economy that are disrupting taxi and livery industries and offering new ways for people to travel without having to own a car. Autonomous vehicles are in the news and on the roads, with significant testing underway. Advanced driver assistance systems (ADAS) like collision-avoidance systems and lane departure warnings are becoming standard options in many new cars.

The role of geospatial data and analytics is one aspect of this transformation that has been underreported. Today, insurers gather mostly static data about the driver, the vehicle itself and the usage of the vehicle. Telematics is providing more real-time data, but a very limited subset of that data is now being used. In the evolving real-time connected world, geospatial data and insights will be required to provide context.

In order to better understand real-time risks, provide advice to policyholders, offer new location-based services and respond immediately to accidents, insurers must have geospatial awareness. This entails knowing the exact location of the car, real-time conditions that are relevant for safe driving (weather, construction, accidents) and location information on the nearest partners (EMS, towing, rental car, etc.). In addition, when an accident occurs, it may be useful to have information about the surrounding infrastructure and topography. Insurers are accustomed to using historical data to underwrite and price policies, and then post-incident assessments to try and reconstruct what happened in an accident. In the real-time, connected world, this will not be good enough. Insurers must have the ability to collect real-time data from the vehicle itself, pair that with relevant geospatial data from external sources and analyze that data to create recommendations quickly – in some cases, in seconds.

See also: Autonomous Vehicles: Truly Imminent?  

As key forces in the transportation sector continue to advance, many issues will need to be addressed, including regulations, liability and changes to the roadway infrastructure. The transition to a world of driverless vehicles, limited car ownership and new modes of transportation may take decades, but the effects are already being felt, and insurers should be planning for the transformation now. Understanding how to acquire, manage and analyze geospatial data should be a key focus area for any insurer that writes vehicle insurance.

The Future of Insurance Is Insurtech

The insurance sector has entered a phase of profound transformation. Numerous insurtech startups—around 1,000, according to Venture Scanner map—have popped up to challenge the traditional model.

I believe that we will see a completely changed insurance sector in the medium term. But I’m convinced that insurance companies will still be relevant in the future, or will become even more relevant than they are now, but these companies will have to be insurtechs, or players who use technology as the main enablers for reaching their own strategic objectives.

The reach of this digital transformation goes way beyond the elimination of “the middle man” from a distribution point of view. The direct digital channel dominates very few markets and deals only with compulsory insurance. In the vast majority of markets, a multichannel-oriented customer continues—with variations from country to country—to choose at least at some point of the customer journey to interact with an intermediary. But the digital transformation happening in the insurance industry is widespread and encompasses all of the phases of the insurance value chain, from underwriting to claims.

See also: Insurtech Has Found Right Question to Ask

Every insurance sector player—whether it’s a reinsurer, a carrier or an intermediary—ought to pose this question: How should the insurance value chain be reshaped by using the new technologies at hand? There are numerous relevant technologies that come to mind, including: the cloud, the Internet of Things (IoT), big data and advanced analytics, quantum computing, artificial intelligence, autonomous agents, drones, blockchain, virtual reality and self-driving cars.

To take full advantage of these technologies, there has to be a structured approach that begins with identifying use cases that can have an actual contribution to reaching strategic business goals, then maximizes their effects inside the insurance value chain of each player. Finally, the approach should look at the software/hardware selection or the “make vs. buy” choices. The essential idea is that “one size does not fit all. Each player needs to create customized use cases based on their individual strategy and characteristics.

To date, there are several types of approaches to mapping insurtech initiatives. I have developed my own classification framework based on six macro areas (awareness, choice, purchase, usage, IoT and peer-to-peer (P2P)).

Insurance IoT, also known as connected insurance, represents one of the most relevant and mature insurtech trends.

Connected Insurance represents a new paradigm for the insurance business, an approach that fits with the mainstream Gen C, where “C” means connectivity. This novel insurance approach is based on the use of sensors that collect and send data related to the status of an insured risk and on data usage along the insurance value chain.

Auto telematics represents the most mature insurtech use case, as it has already passed the test and experimentation phase within the innovation unit. It is currently being used in daily work within motor insurance business units. In this domain, Italy is an international best practice example: According to the SSI’s survey for the Connected Insurance Observatory, more than 70% of Italians show a positive attitude toward motor telematics insurance solutions. According to the Istituto per la Vigilanza sulle Assicurazioni (IVASS), about 26 different insurance companies present in Italy are selling the product, with a 16% penetration rate out of all privately owned insured automobiles in the second quarter of 2016. Based on information presented by the Connected Insurance Observatory—a think tank I created in partnership with Ania that brings together more than 30 European insurer and re-insurer groups—the Italian market will surpass 6 million telematics policies by the end of the year.

See also: Insurtech: One More Sign of Renaissance  

Based on this data, we can identified three main benefits connected insurance provides to the insurance sector:

  1. Frequency of interaction, enhancing proximity and interaction frequency with the customer while creating new customer experiences and offering additional services
  2. Bolstering the bottom line, improving insurance profit and loss through specialization,
  3. Knowledge creation and consolidating knowledge about the risks and the customer base


The insurance companies that are part of the Observatory are adopting this new connected insurance paradigm for other insurance personal lines. The sum of insurance approaches based on IoT represents an extraordinary opportunity for getting the insurance sector to connect with its clients and their risks. The insurers can gradually assume a new and active role when dealing with their clients—from liquidation to prevention.

It’s possible to envision an adoption track of this innovation by the other business lines that are very similar to that of auto telematics, which would include:

  • An initial incubation phase when the first pilots are being put into action to identify use cases that fit with business goals;
  • A second exploratory phase that will see the first rollout by the pioneering insurance companies alongside a progressive expansion of the testing, to include other players with a “me, too” approach;
  • A learning phase in which the approach is adopted by many insurers (with low volumes) but some players start to fully achieve the potential by using a customized approach and pushing the product commercially (increasing volumes);
  • Finally, the growth phase, where the solution is already diffused and all players give it a major commercial push.

After having passed through all the previous steps in a period spanning almost 15 years, the Italian auto telematics market is currently entering this growth phase. The telematics experience teaches us three key lessons regarding the insurance sector:

  • Transformation does not happen overnight. Telematics—before becoming a relevant and pervasive phenomenon within the strategy of some of the big Italian companies—needed years of experimentation, followed by a “me, too” approach from competitors and several different use cases to reach the current status of adoption growth.
  • The companies can be protagonists of this transformation. By adding services based on black box data, telematics has allowed for improvements in the insurance value chain. Recent international studies show how this trend of insurance policies integrated with service platforms is being requested by clients. It also shows that companies, thanks to their trustworthy images, are considered credible in the eyes of the clients and, thus, valid to players who can provide these services.
  • If insurance companies do not take advantage of this opportunity, some other player will. For example, Metromile is an insurtech startup and a digital distributor that has created a telematics auto insurance policy with an insurance company that played the role of underwriter. After having gathered nearly $200 million in funding, Metromile is now buying Mosaic Insurance and is officially the first insurtech startup to buy a traditional insurance company. This supports the forecast about how “software is eating the world”— even in the insurance sector.

What I Learned at Google (Part 2)

We didn’t intend to write a series on the symposium that Insurance Thought Leadership hosted at Google last week for C-suite executives of major companies and for regulators, but I want to build on the wonderful post yesterday by Iowa Insurance Commissioner Nick Gerhart, about the insights he picked up there. For me, the symposium underscored a crucial point about the pace of innovation — how it can be faster than we expect at times but can also be slower.

And it’s crucial to get the timing right.

The faster-than-expected part comes from a partner at one of the major Silicon Valley venture capital firms, which we visited as part of the symposium. All these firms track where entrepreneurs are seeing possibilities and where investments are happening, and the partner said that in all of 2014 the firm had been visited by exactly zero people hoping to innovate in insurance. Yet, just in the fourth quarter of 2015, the firm met with 60 companies looking to innovate in insurance.

Even as innovation has surged in fintech, in general, investment in insurtech start-ups has been minimal, about 1% of the total for fintech. But that may now be changing. Start-ups may accelerate the disruption in insurance.

You’ve been warned.

The slower-than-expected (at least for me) part comes from a consensus about driverless cars at the symposium. The group discussions at all five tables reached almost identical conclusions: that fully driverless cars will be feasible technologically in roughly four years but that it will be 10 before they are a major presence on the road.

In Silicon Valley-speak, saying something is 10 years out means it verges on science fiction. After all, 10 years at a pace set by Moore’s Law means that you have some 30 times as much computing power available to you at no increase in cost — if you need that much more power to make something happen, it’s hard to know for sure that it works 10 years ahead of time.

But the concerns of the insurance C-suiters and the regulators were more prosaic. They felt that anyone who might be left behind because of driverless technology would kick up a fuss and that state governments, likely led by the legislatures, could intervene on behalf of constituents to slow the transition.

Perhaps insurance agents would fear the shift of auto insurance from a personal responsibility to a corporate one, shouldered by the manufacturers of the driverless cars or by operators of fleets of the cars — if no person is involved in driving, how can an agent sell personal lines insurance?

Maybe car dealers, already fighting a rear guard action to prevent direct sales by manufacturers to consumers, would fear further loss of their intermediary role — why would a fleet operator need a dealer to purchase of tens of thousands of cars?

Basically, think of anyone who might lose business because of driverless cars and the promised reduction in accidents — parking garages, emergency rooms, whatever — and you can see an obstacle. Not everyone will be explicit about their complaints. It’s hard for an operator of prisons or funeral homes to demand more business. But our discussion groups were sure that opposition would surface in lots of ways and that politicians, always running for reelection, would lend support.

In fact, some technical concerns about driverless cars have surfaced in recent months. It turns out that Google cars have more accidents than human drivers do, albeit only minor accidents thus far and, most importantly, not because of any fault by Google — careless people seem to bump into Google cars a lot at stoplights. Google also acknowledges that the cars would have caused at least some accidents if not for intervention by the highly trained humans sitting in the driver’s seat. So, the technology still has a ways to go.

The pace of technical progress has still been faster than I expected when Chunka Mui and I published Driverless Cars: Trillions Are Up for Grabs nearly three years ago, and we staked out what was then a very aggressive position. The federal government recently stepped on the gas, if you will, by announcing a plan to spend $4 billion on driverless technology over the next decade and to reduce regulatory hurdles for adoption. The rationale — which we have long predicted the government would have to adopt — is that 25,000 lives could have been saved last year on U.S. highways if a mature form of the technology had been in use.

For me, then, the fundamental question from our symposium is: How do you position yourself for a technology that may be wildly important, yet whose timing is uncertain?

Two thoughts:

–A line that carries considerable currency in Silicon Valley is: “Never confuse a clear view with a short distance.” Even if you’re sure that something will happen as part of the transition to autonomous vehicles, keep in mind the issue of timing.

–Then think big, start small and learn fast — a dictum that just happens to come from another book Chunka and I wrote, The New Killer Apps: How Large Companies Can Out-Innovate Start-UpsThat means you get in the game now, with as big a vision as you can conjure up for yourself or your company. Then you start experimenting to see what works and what doesn’t — while spending extremely little money. You make sure you can kill the experiments as soon as you gather the needed information — no pilot projects allowed, at least not in the early days, and certainly no grand plans to go to market. And you keep iterating until both you and the market are ready. Then you start cashing checks.

Actually, one more thought: Consider coming to the Global Insurance Symposium that Nick and the fine folks in Des Moines (my dad’s hometown) are putting on in late April. Nick is as forward-thinking a regulator as I’ve met, and there will be lots of people there who can help you on your journey, whether that involves driverless cars or something else entirely. I’ll be there….

The Growing Disruption in Auto Ecosystem

DISRUPTION IN THE AUTOMOTIVE ECOSYSTEM: What to Expect, and How to Survive and Win

 

For the purposes of this paper, and to explain the codependencies and inter-industry impacts, we’ve chosen to define the auto ecosystem as including all business segments affected by the automobile, including: auto manufacturing, auto buyers and drivers; collision repairers; aftermarket suppliers, including parts providers; auto insurance companies and their policyholders; and the deep and extensive claims and services supply chain that supports them, such as the technology and information provider segments. Given the broad scope and complexity of the component topics, we have identified and provided a degree of depth on each one, but by no means should this information be considered exhaustive.

The entire auto ecosystem is in the midst of significant disruption, and the dizzying pace of change will only continue to accelerate. This disruption is the result of the convergence of upstream upheaval in these sub-segments of the auto ecosystem:

• “new consumer” behavior and expectations

• technology evolution, including mobility and the Internet of Things

• the digital data gold rush and the adoption of advanced analytics

• globalization integration, collaboration and supply chain consolidation in the automotive ecosystem

• collision repair industry consolidation

Over the last 30 years, the auto repair and automotive aftermarket segments were part of a steady and inevitable evolution. During this long-term progression, the auto physical damage industry adapted to a myriad of business innovations, technology enablers, program and process changes and product and service introductions. Some resisted these innovations as either real or perceived business disruptions or dis-intermediation while others embraced them as opportunities to be leveraged for business, market and strategic transformation.

The 2007/2008 “Black Swan” event, the U.S. recession, affected our entire economy and loomed large and ominous for a number of years. This became the foundation for today’s unmatched auto physical damage industry transformation. It triggered the start of unprecedented structural change within the U.S. and Canadian auto repair and aftermarket segments. This changing landscape became part of four distinct, yet connected, marketplace phases: contraction, consolidation, convergence and constructive transformation, which continue today.

Additionally, these four phases are being affected by a confluence of numerous, dynamic and impinging forces, which have both disruptive and transformational influences on today’s stakeholders. Some of the more influential external impact factors include:

• globalization

• private equity investment

• accident safety and avoidance technology

• predictive analytics

• telematics and integrated claims process models

• insurer multiple-shop operator, strategic performance-based, direct repair program (DRP) contracts

• new and hybrid direct repair program models

• OEM- certified networks’ influence in the repair process

• morphing demographics

• multi-system operators (MSOs), growing market dominance and insurance carrier acceptance

• repair segmentation

• national technician shortage

• complex vehicle technology and proliferation of advanced materials

• urbanization

• increased complexity in insurance company DRP participation requirements

Consequently, the traditional process of linear thinking, with its straightforward cause-and-effect structure, is giving way to a more realistic and more complex multi-dimensional thinking pattern that heightens the understanding of the frequency, acceleration and degree of change. It is important, in light of this, to build and leverage a strategic alliance ecosystem with customers, suppliers, competitors, investors and business partners to maintain and grow a collaborative brain trust. This shared commitment will help to co-create and foster constructive change within an organization in an attempt to influence its uncertain environment for the mutual benefit of all strategic partners.

Evidence of disruption in the auto insurance industry and its extensive supply chain is plentiful and portends even greater change. Long-standing leaders in the U.S. auto insurance industry have lost significant market share to more innovative consumer-centric carriers. Advanced analytics and telematics technologies have combined to enable new forms of insurance products, including usage-based insurance. The Internet of Things, including the connected car, will amplify this trend going forward and literally change the fundamental nature of insurance and risk management products, solutions and servicing. For example, consumers are now shopping for and purchasing auto insurance, and submitting and receiving claim payments, on their smartphones. Fueled by the entry of large and growing pools of private equity capital, rapid industry consolidation is occurring across several supply chain segments including the once highly fragmented collision repair industry and alternative parts supplier markets.

In this dynamic environment, we believe that the ultimate leaders and winners in 2015 and beyond will be those companies that most successfully focus and execute on the development of compelling personal mobility solutions; transform product development and distribution around the new consumer; leverage data and analytics across the enterprise; think, plan and execute globally; and aggressively collaborate, partner and affiliate as effectively as possible.

The new consumer, mobility and the internet of things

Today’s consumer is totally unlike that of the past, and they have created new challenges and opportunities for all participants in the automotive ecosystem, in particular for auto insurers. This new consumer, epitomized by Millennials, has embraced mobile technologies and the social media they support. This phenomenon has fundamentally changed how insurance is branded, marketed and sold. Moving forward, this same mobility will enable insurers to design completely new types of insurance products and manage risks much more effectively for policyholders and themselves.

The most disruptive group of mobility technologies is the rapidly emerging Internet of Things, much of which is controlled today by industry outsiders. The potential impact on numerous aspects and multiple lines of insurance, as well as on the rest of the auto ecosystem, is enormous.

Of related concern to the insurance industry should be the potential for these outsiders to leverage this valuable information to enter the business and become competitors. Some recent acquisitions include Facebook’s purchase of the fitness and location app Moves, Monsanto’s acquisition of crop insurance and data company Climate Corp. (which was started by former Google executives) and Google’s acquisitions of the connected home devices and security company Nest and the Israeli location-mapping service Waze. Verizon acquired Hughes Telematics in 2012.

The data generated by all of these businesses, which was never before so digitally available, can be combined with advanced analytics to accurately establish and manage individual and property risks. The ability to successfully acquire, control and effectively translate and use all of this data will determine the insurance industry’s digital gold rush winners and losers of the future.

Impact of OEM globalization

The impact of automotive industry globalization is pervasive within the automotive and aftermarket industries. It is one of the more significant continuing influential macro factors within the larger constellation and confluence of simultaneous conditions affecting the auto physical damage landscape. For example, the change caused by how vehicle manufacturers are aggressively re-engineering and consolidating their light vehicle platforms is evident in the worldwide auto manufacturing transformation underway; General Motors is planning to reduce in 10 years its current 26 global production platforms to just four by 2025. This globalization of cars and its many OEM implications will continue to drive significant change throughout the entire property and casualty auto insurance and auto physical damage aftermarket supply chain.

One of the key drivers of this manufacturing transformation is the National Highway Traffic Safety Administration’s CAFE standards, which require average manufacturer fleet fuel consumption to drastically improve from today’s 30.2 miles per gallon to 54.5 miles per gallon by 2025. By the 2016 model year alone, there will be approximately 250 new and different vehicle debuts and redesigns from both U.S. and foreign manufacturers. Ultimately, achieving strategic goals and objectives such as reducing fuel consumption and gas emissions by improving fuel economy and reducing the environment’s carbon footprint reflect the current megatrends end game.

As the OEMs drive to innovate globally, there will be intended and unintended outcomes involving the use of many new materials, engine downsizing, alternative powertrains, advanced integrated electronics, telematics and new repair technologies and processes, and producing light-weight vehicles. These innovations will be seen as a disruption by some, while being embraced by others who seek to leverage these global influences for future growth and competitive advantage.

Other ecosystem and supply chain industry consolidation

Another globalization perspective is being driven by increasing international trade and investment by private equity and strategic buyers involving an explosion in mergers and acquisitions within the property and casualty insurance and auto physical damage industries in the U.S. and throughout the world.

The following is a partial list of some of the more relevant recent M&A activity by U.S. and international companies in this ecosystem:

• CCC Information Services acquires telematics and UBI solutions provider DriveFactor

• Hartford-based Insurity acquires Montreal-based Oceanwide

• Patriot National’s Technology Solutions unit acquires Vikaran Solutions in Pune, India

• Uber acquires control of Metromile (PAYD) insurance, U.S.

• Google acquires CoverHound, an insurance aggregation website, U.S.

• Google’s Nest unit buys Dropcam

• Fosum buys Meadowland, a first-ever acquisition by a Chinese insurer of a U.S. insurer

• Alliant Insurance Services of the U.S. buys the U.S. agency business of Australia’s QBE

• Majesco acquired Cover-All Technologies and Agile Technologies, U.S.

• Symphony Technology Group acquires Aon e-Solutions from Aon (UK)

• ACE (Bahamas) buys Fireman’s Fund U.S. personal lines business

• Vista Equity acquires TIBCO for $4.3 billion, U.S.

• Onex (Canadian private equity firm) acquires York Risk Services for U.S. $1.325 billion, U.S.

• Element Financial (Canada) acquires U.S.-based PH&H fleet management business for U.S. $1.4 billion

• Mapfre Insurance, Spain, acquires Commerce Insurance and MiddleOak personal lines, U.S.

• QBE Insurance, Australia, acquires Balboa Insurance, U.S.

• Travelers Insurance, U.S., acquires Dominion Insurance, Canada

• Desjardins Insurance, Canada, acquires State Farm Canada, U.S.

• Boyd Group, Canada, acquirers Gerber Collision and Glass, U.S.

• OMERS, Canada, acquires Caliber Collision Centers, U.S.

• UniSelect, Canada, acquires Finish-Master, U.S.

• Solera, U.S., acquires Velexa Technologies, UK

• Solera, U.S., acquires CAP Automotive, UK

• Belron, South Africa, acquires Safelite Glass, U.S.

• LKQ, U.S., acquires EuroParts, UK

• UBM, UK, acquires Advanstar-Motor Age and Auto Body Repair News ABRN, U.S.

• The Carlyle Group (owners of Axalta and investors in Service King) acquires Nationwide Accident Repair Services of the UK

These acquisitions reflect the growing trend of an increasingly integrated global insurance and automotive economy resulting in an extension of business and market international strategies, introduction of new, innovative and disruptive technologies and processes, and brand expansion while also managing resource and risk diversification.

The digital data gold rush/ advanced analytics

We have entered a “digital Gold Rush” era – a modern version of the California Gold Rush of 1849 – with the gold being digital data, which is beginning to flow in torrents. This has huge implications for the insurance industry, and not least for property and casualty claims. Digitization is already having an impact across the claims technology and services supply chain, forcing supplier consolidation and compressing customer service cycle and response times to near real time. These forces will affect property and casualty claims technology, as well as information and services provider segments, which have historically been highly fragmented and privately owned and operated. National consolidation, volume aggregation and the infusion of sizable technology investments led by professional management teams offer significant medium-term rewards to the participants.

The most potentially disruptive group of digital technologies of all is the rapidly emerging “Internet of Things” or “M2M” (machine-to-machine) technology, with its potential impact across multiple lines of insurance. Of related concern to the industry should be the potential for non-traditional competitors to leverage M2M data and enter their business. An example is Google’s acquisition of the connected home devices and security company Nest Labs. The data acquired in all of these businesses, never before so digitally available, will be combined with advanced analytics to accurately establish and manage individual and property risks.

These powerful forces are all converging to drive mergers and acquisitions activity to unprecedented levels in the property and casualty insurance claims technology ecosystem, attracting increasing numbers of private equity and strategic investors, and providing attractive exit opportunities and strategic alternatives for participants, all while creating exciting new and innovative technology-enabled capabilities for insurers, agents, brokers and consumers.

Private equity and collision repair industry consolidation

The first two phases of the current collision repair industry structural transformation, contraction and consolidation, are part of a four-phase model consisting of contraction, consolidation, convergence and constructive transformation. These first two phases began to emerge and quickly expand after the start of the recession in December 2007. Simultaneously, private equity groups turned their attention to the collision repair industry; they looked under the hood and liked what they saw.

Private equity firms were on the hunt to find alternative investments that could yield comparative or better returns than were currently available during the trough and slow recession recovery between 2007 and today. Additionally, their interest is backed and driven by unprecedented amounts of strategic buyer, private equity and pension fund dry powder/cash-seeking investments that can drive higher valuations and returns on their capital invested. The current private equity investor groups competing in the consolidation of the auto repair industry are identified in the chart below.

There are a number of factors affecting the continued attractiveness of investing in the collision repair industry.

• the collision repair industry’s structural transformation is still early to mid-stage

• the stigma from consolidation’s failed first attempt during the early 2000s is now fully erased

• excess strategic and private equity capital continues to seek high-return, quick-turn investments, which are characterized by recurring revenue, free cash flow and attractive returns on invested capital

• aggressive MSO consolidator and private equity competition

• debt financing is inexpensive and available

• collision repair management teams realize the benefit of strategically partnering with investors to more quickly grow and develop market share

• $32 billion addressable collision repair industry size

• high barriers to new entrants associated with the MSO consolidator model

• business complexity

• mature management teams

• performance-based insurance DRP contract requirements

• brand recognition

• demonstrated economies of scale

• rising operational excellence with lean-based process environment

• replicable acquisition and integration models

• leveraging and expanding technology enablers

• insurance industry strategy aligned with MSO consolidator strategy

p1

As consolidation continues to drive collision repair industry contraction, four MSO consolidators, ABRA, Boyd/ Gerber, Caliber and Service King stand out as the primary buyers or disruptors vying for multi-location and multi-region platform acquisitions. More nascent strategies are focused on market density and coverage through “build outs or tuck-ins,” acquisition of individual shops, constructing “green fields” and “brown fields” and utilizing franchise models in smaller tier markets.

The growth of MSO consolidators associated with these transactions has in all cases had private equity backing. When viewed in the context of an approximate $32 billion auto repair marketplace, there is room for further consolidation in what is still an oversupply of repairers within the approximately 33,000 U.S. auto repair locations.

The transfer of just more than $1.5 billion in multiple-location operator (MLO) platform transaction repair revenue from 2012-2014 excludes three large recapitalizations that included Caliber in 2013 and ABRA and Service King in 2014. If these recapitalizations were included, the total transfer of MSO consolidator revenue would have been slightly more than $3 billion, or approximately 10% of the industry’s annual revenue. Additionally, the MSO segment representing at least $20 million in annual revenue included 80 MSO organizations processing $6.3 billion in annual revenue at year-end 2014. How long private equity continues its aggressive funding of MSO consolidators is uncertain.

Supply chain consolidation in the auto insurance ecosystem

Beyond the collision repair segment, an unprecedented and powerful number of forces are converging to drive mergers and acquisitions activity in the North American property and casualty insurance claims and technology “ecosystem” to historically high levels, including:

• claims supply chain rationalization and consolidation

• rising adoption and deployment of big data and analytics solutions

• insurance product commoditization and the resulting business transformation

• an influx of private equity capital (already raised and seeking to be deployed in the sector)

• expectations of a continuation of a steadily improving economy with the prospect of lingering low interest rates

We expect these forces to amplify competition among well-capitalized strategic players and private equity participants who seek to create scalable and defensible positions in the industry. The implications for smaller, less capitalized, regional or technology- challenged competitors are meaningful.

Claims supply chain consolidation

The area in which we expect the greatest potential for increased activity in 2015 and beyond is within the claims supply chain. The property and casualty insurance claims ecosystem is composed of thousands of small local and independent firms as well as larger regional, national, and global vendors and business partners that provide mission-critical products and services to the claims operations of the property and casualty insurance industry, including:

• insurance technology and IT services, system integrators, core system and claims management software solutions and database and information providers, including communication, repair estimating and body shop management systems

• claims technology vendors (document management, compliance, data quality, payment systems, etc.)

• collision and auto glass repairers

• collision repair parts suppliers

• insurance replacement rental car providers

• third-party administrators and claims business process outsourcing firms

• claim services, including independent auto and property adjusters and appraisers and catastrophe services

• insurance defense attorneys

• auto and casualty claims management solution providers

• salvage vehicle auctioneers and towing services

• insurance staffing firms

• insurance claims investigation firms

p2

One of the subsectors most affected by these factors is the highly fragmented and inefficient collision repair and parts business. Many of these are local, privately owned businesses with limited technology capabilities and management talent. National consolidation, often driven by private equity, can lead to expense rationalization, upgraded information technology systems, improved management and the ability to better respond to upstream customer pressure and improved pricing. By way of example, since its founding in 1998, LKQ (NASDAQ: LKQ) has consolidated the automotive repair alternative parts market in North America and elsewhere to become the largest provider of alternative collision replacement parts and a leading provider of recycled engines and transmissions, with annual revenue approaching $7 billion. In 2014, LKQ acquired Keystone Automotive, a leading distributor of aftermarket parts and equipment.

Additionally, one of the other important trends is the development of an electronic parts procurement and e-commerce solution for the large $15 billion, and still highly fragmented and inefficient, North American auto repair parts supply chain.

For smaller providers in the claims supply chain, now may be the time to consider combining with a larger, better-capitalized player, especially given the trend toward vendor management by insurance companies. A “going it alone” strategy will be increasingly risky as larger, national players will garner more market share by offering better pricing, superior technology solutions and greater geographic coverage than “mom and pop” operations.

Claims information provider expansion and consolidation

North American insurance industry auto and property claims operations, including their auto collision repair and property partners, primarily use the products and services of three claims information providers, each of which has expanded its offerings into automotive claims-related markets.

CCC Information Services: Private equity-backed CCC Information Services (Leonard Green & Partners plus TPG Capital), a database, software, analytics and solutions provider to the auto insurance claims and collision repair markets, recently acquired Auto Injury Solutions, a provider of auto injury medical review solutions. This follows the earlier acquisition of Injury Sciences, which provides insurance carriers with scientifically based analytic tools to help identify fraudulent and exaggerated injury claims associated with automobile accidents. In December 2014, CCC acquired the assets of Actual Systems of America, including its interest in Pinnacle Software, an automotive recycler and yard management system provider, which will enhance its fast-growing TRUE Parts alternative collision repair parts procurement platform. In May 2015, the company further extended its insurance claims solution capabilities by acquiring telematics driving data and analytics provider DriveFactor.

Mitchell International: In 2014, Mitchell International, a provider of technology, connectivity and information solutions to the property and casualty claims and collision repair industries, acquired pharmacy claims management software vendor Cogent Works as well as Fairpay Solutions. Fairpay’s service offering includes workers’ compensation, liability and auto cost containment and payment integrity services. These assets will expand Mitchell’s solution suite of property and casualty insurance-focused bill review and out-of-network negotiation services as it complements its 2012 acquisition of National Health Quest. Mitchell was acquired in 2013 by KKR & Co. (NYSE:KKR).

Solera, Inc.: The breathtaking series of recent U.S. and foreign automotive service industry and data acquisitions in 2014 by Solera (NYSE:SLH) includes the Czech and Slovakian vehicle valuation provider IBS Automotive, the UK vehicle valuation firm CAP Automotive, the insurance and services division of PGW (including LYNX, GTS and Glaxis), the claims-related business of UK-based Sherwood Group (Valexa Technolgies), AutoPoint (U.S.) and AutoSoft (Italy). HyperQuest (U.S.) was acquired in 2013 along with Distribution Services Technologies and Services Repair Solutions (U.S.), Serinfo (Chile), Pusula Otomotiv (Turkey), Ezi- Works/CarQuote (Australia) and APU Solutions in 2012. Since its initial public offering in 2007 (originally backed by private equity firm GTCR), Solera has completed 30 acquisitions globally and grown its revenue to more than $1 billion.

Over the next 12 months, we expect these information providers to expand in several directions through internal product development supplemented by strategic acquisitions. This expansion will likely include:

• deeper integration with claims management core systems

• introduction of new tools and services utilizing advanced analytics for use cases across the entire auto and property claims process

• deeper and wider integration with third-party companies in the auto and property claims supply chain, specifically including collision repair parts procurement

• further development of auto casualty and workers’ compensation medical management networks and services and cost containment solutions.

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Predictions for 2015 and beyond

• The macro influencers of contraction, consolidation and convergence, combined with the intensity and high velocity of change among the confluence of simultaneous events, will continue to overlay and affect the structural change and the continuing constructive transformation currently happening within the entire automotive ecosystem.

• Property and casualty insurance carriers will develop new forms of highly customized and contextual insurance coverage tied to policyholders’ real-time needs.

• Property and casualty insurance carriers will sell micro-insurance and risk management services to customers based on digital connections to their bodies, automobiles, homes and other personal property; collectively composing the Internet of Things,

• Insurance carrier supply chain partners will increasingly assume claims servicing and resolution responsibilities and may well assume some or all of the associated risks in exchange for guaranteed transaction volume.

• Direct repair assignments through customer choice among the top 10 property and casualty auto insurers continue to grow, and many now have an assignment conversion rate of more than 50% to their DRP providers

• Analytics will evolve to change every aspect of insurance, including marketing, distribution, underwriting, pricing, claims and billing

• The pace and scope of supply chain consolidation within the auto insurance ecosystem will accelerate sharply in 2015 as existing players move to protect and grow their market shares. New, well-capitalized and more consumer-savvy players will enter the market with an array of powerful digital assets. Investors will continue to gravitate to the space, betting on attractive short-term upsides and adding fuel to the fire.

• MSO consolidators will continue to execute on their platform acquisition growth and development strategies. They will supplement their multi-regional and national growth with a combination of single repair center acquisitions, Brown field and green field build outs and franchise expansion to improve coverage and density in existing major and smaller markets.

• The traditional insurer-repairer business model, which is focused on an estimate exchange process, is likely to be transformed within three years and supplanted by a process driven by mobile technologies coupled with predictive analytics. This will reduce and eventually eliminate the need for repairer-carrier estimate exchanges for an increasingly higher percentage of claims.

Conclusions

• The ultimate leaders and winners in 2015 and beyond will be those companies that most successfully focus and execute upon the new realities identified in this report. They will also leverage a strategic alliance ecosystem in which they team up for success. They will accomplish this with customers, suppliers, competitors, investors and business partners as part of a collaborative brain trust where all are committed to co-create and change their organizations and their uncertain environments to their individual and mutual benefit.

• In this dynamic environment, we believe that the ultimate leaders and winners in 2015 and beyond will be those companies that most successfully focus and execute on the development of compelling personal mobility solutions and transform product development and distribution around the new consumer. They will leverage data and analytics across the enterprise, think, plan and execute globally and aggressively collaborate, partner and affiliate as effectively as possible.

• The auto parts supply chain, one of the most fragmented of all segments in the ecosystem, and until now characterized by numerous competing parts search and procurement platforms, will finally begin to consolidate in the hands of just a few well-capitalized, highly experienced and strategically positioned information and software providers.

• The ability to successfully acquire, control and effectively translate and leverage all of these new streams of data into actionable information and insights will determine the insurance industry’s digital gold rush winners and losers of the future.

• The area in which we expect the greatest potential for increased disruption in 2015 and beyond is within the claims supply chain.

• For smaller providers in the claims supply chain, now may be the time to consider combining with a larger, better-capitalized player, especially given the trend toward vendor management by insurance companies. A “going it alone” strategy will be increasingly risky as larger, national players will garner more market share by offering better pricing, superior technology solutions and greater geographic coverage than “mom and pop” operations.

• Many of the trends associated with the beginning of a slow, long-term, downward slope of future accident frequency such as the proliferation of accident avoidance technology, urbanization, car sharing, Uber, connected vehicles and telematics are already cooked into the expanding equation and future auto insurance and repair model reflecting reduced auto accidents and fewer repairable vehicles with new and hybrid insurance coverage offered by fewer surviving insurers.

This was originally published in the U.S. in ABRN in the July 2015 edition and in Canada in Collision Repair Magazine in the August 2015 edition.

Inside Perspective on Auto Fraud, Part 1

This is Part 1 in a two-part series on automobile insurance fraud.

Introduction

Traffic engineers would love to unblock the clogged arteries of Southern California’s freeway system, where rush hour is anything but “rush” — more like gridlock. But in a land where one’s car is one’s empire, one’s freedom and personal statement, carpooling is a tough sell. The high-occupancy vehicle (HOV) lanes have scant occupancy. In fact, cars carrying multiple passengers are such a rarity that they, alone, raise red flags for auto insurance claims adjusters.

Operating under the radar is a fast-growing segment of the “underground economy” — organized criminal enterprises that stage automobile collisions to defraud insurance companies of medical payments. In some cases, the entire incident is created on paper, with fictitious vehicles and false identities. In other cases, the perpetrators take real vehicles with legitimate insurance policies out to vacant lots or remote fields to crash them and then fill out a report. The most compelling cases are the ones where participants intentionally ram vehicles together on city streets — often a rear-end collision in a left-turn lane — then dial 911 and wait for police and emergency medical services (EMS) to arrive. This approach triggers a police report and EMS records, which lend an air of legitimacy to the event. It really happened.

Based on instructions from a stager, the driver and two or three passengers — who are known as “stuffed passengers” — report neck and back injuries. The passengers later visit a physician or chiropractor who is in collusion with the criminal ring. The patients sign in and leave without receiving any treatment. If the insurance company balks at paying the specious claim, the claimant enlists the help of an attorney who is also party to the scheme. The attorney is tenacious, willing to go to court, generally able to bluff until the insurance company backs down and settles.

In the process, everybody except the insurance company gets easy money. Property damage to the vehicle is paid to the owner of the vehicle, while multiple players split the proceeds of the settlement for medical payments. In a typical case where the insurance company settles for, say, $6,000, each vehicle occupant might get $1,000, the lawyers and doctors collect their fees and the enterprise leader retains 50% of the professional services fees plus the balance of the claimants’ settlement, if any. If the enterprise leader successfully stages dozens of such incidents a month, it’s a lucrative business.

This practice exploded in Southern California in the mid-1990s. If you are a special investigations unit investigator, you are dealing with this every day. The average caseload for an adjuster or claims representative might be 150 or 200 a day, depending on the size of the company. At least 25% of that is some flavor of fraud. It’s either a false claim or an embellishment to it. People are doing it. Even people who think of themselves as law-abiding are doing it, because they don’t think of insurance companies as victims. This type of activity is so prevalent that our undercover investigators would hear paramedics on the scene saying, “Okay, which one of you is going to the hospital this time?”

Automobile insurance fraud is such easy money that the business is even creating unlikely bedfellows. For example, in south central Los Angeles, the Bloods and Crips — gangs that have had an intense and bitter rivalry — are now cooperating with one another in organized insurance fraud, because it’s more profitable to join forces.

Six Steps to a Successful Insurance Scam

Constantin Borloff (not his real name), the former leader of a successful and sophisticated fraud enterprise that operated in San Diego, Los Angeles and San Francisco, shares his top tips for making fraud pay. Having paid his debt to society, the ringleader now tells insurance companies how he was able to steal so much money from them, who does it and why it’s so easy.

Go for the Med Pay Money
Borloff would insist that vehicle insurance policies have med pay coverage — coverage for reasonable expenses to treat accident-related bodily injury. Because this coverage follows the vehicle, passengers in a vehicle that has med pay coverage will likely be covered, as well. Borloff gave vehicle owners a list of insurance companies that would freely provide these policies.

In theory, claimants are supposed to repay med pay money if they receive a settlement, but that doesn’t happen, according to Borloff. “For all history, maybe two times the insurance company asked for money back. If you say you don’t have money and can’t pay it back, they say, ‘Okay, don’t pay back the money.'”

Find the Inattentive Insurance Companies
Borloff also selected insurance companies with a reputation for laxity, the ones whose claims representatives didn’t take a stand and ask the hard questions. “Big companies like State Farm or Farmers have millions of policies, good special investigation units and more experienced adjusters, so that’s where you would see more problems. It’s better to go to the smaller company or where it’s not their main business. These companies usually pay more, while the big companies usually pay a little less.”

Insiders in the business share this information, so they know which companies to avoid and which ones would pay off like loose slot machines in Henderson, NV.

What would make an insurance company an unattractive target? “I don’t know what will stop me,” Borloff. said “All insurance companies are bound by law to pay. So for us, the system is working perfectly. The insurance company can fight, and they have a lot of resources to fight, but eventually they have to pay something. Maybe more, maybe less, but eventually they have to pay something.”

Choose Participants Who Won’t Raise Suspicion
In a perfect world, your participants are white American citizens with clean driving records and their own driver’s licenses. Judges and juries look most kindly upon this type of claimant, according to Borloff.

It is equally important that their behavior fits accepted patterns. For instance, policies should be active for four to eight months before the staged collision. Claims should be modest, usually no more than $5,000 or $6,000. Activities were choreographed to avoid triggering red flags. “I know insurance companies have about 25 red flags,” Borloff says. “What the claims adjusters know, the criminal enterprise knows twice. I knew about all these red flags, and I tried to avoid them.”

Distributing the cases is one way to avoid detection, Borloff said. “If the enterprise will do, say, 20 collisions a month, the claims will go to five different insurance companies, each to a different attorney — 10, 15 or 20 different attorneys — and any given adjuster will have at most two cases to a specific attorney. Will the adjuster be suspicious about it? I don’t think so. It’s very difficult for the insurance company to catch these people in this situation.”

Borloff tells of a fringe case where a woman, working against the advice of her stager, staged four accidents in a single week. She submitted claims to four different insurance agencies. All four claims were paid, but this pattern of activity could have exposed everybody in the fraud enterprise to scrutiny and discovery.

Pay More Than Lip Service to the Medical Treatment
When private investigators were first sent to wait outside medical clinics to observe and videotape (the comings and goings of visitors), the first people they caught were the ones who walked in, signed in and left within a minute. People quickly learned to stay longer inside the clinic and have follow-up visits at intervals that would seem appropriate for their injuries and type of care.

Keep Your Stories Straight
Cappers and stagers write notes for people so they can remember their stories when talking to claims representatives and, later on, if they meet with an attorney and go into depositions. Somehow, somewhere, there is a record of all this. If the ring is dealing in volume, there must be good notes, or they won’t remember the details of a case, and that’s how they get tripped up. Some stagers get tripped up simply by having these notes in their possession — in their offices or briefcases, waiting to be found during a routine traffic stop or search.

Insulate the Players From Each Other
These groups tend to function as classic cell networks. In an effective cell network, the claimant may or may not be exposed to the other people involved, or may be only exposed to the doctor but not to the attorney. That’s how these people are protected from one another. Participants may not have a knowledge of what else the group is doing. When we arrested 72 people on a state level and brought them into interrogation rooms for 72 hours, it was pretty clear that they only knew their own activities or those of friends they had brought into the group. They had no knowledge of the bigger scheme. That’s how you protect your enterprise.

The parties in these fraud rings learn never to admit to anybody that the accident was staged. Everybody in the enterprise knows it, but if you tell even one person, there’s a point of vulnerability. It is especially important to insulate the medical and legal providers, because their professional licenses are critical to facilitate these claims. They take it all the way and never back down.

How often would a criminal enterprise walk away from a case because an insurance company’s special investigations unit got involved? “I would not walk away, but I would accept lower settlement, for sure,” Borloff said. “One time, one of my colleagues made a terrible mistake and sent 63 cases to Allstate — one attorney, same office. They came to me and said, ‘What should we do now, SIU is after us?’ I said, ‘Don’t give up, try to fight,’ but they decided to give up. It was the biggest red flag. They lost money. It upset people.” Giving up is tantamount to an admission of wrongdoing.

This series of articles is taken from the SAS white paper of the same name. © 2013, SAS Institute Inc. Used by permission.