INSURANCE COMPANY ABUSE OF MARKET POWER

This headline will distress those in the insurance sector but the article was relayed to us for comment and we thought it a valid discussion. It centres on the age-old “David & Goliath” argument as related to Insurance companies versus collision repairers – in essence, one is nailing the other against the wall. The article’s written by The Crash Repair Blog Australia, we think it speaks for itself so have transposed it in it’s entirety. We’ll be interested to hear from views from both sectors.

Tuesday, 2 April 2013
ABUSE OF MARKET POWER?
In a normal free-market economy, supply and demand play a contributing factor in a market segment pricing its goods and services. So, where there is a consistent demand for a product or service and at the same time there is a limited or shrinking supply capability, the market rates for the goods or services naturally rise. With the Australian repair sector shrinking both in the number of repair establishments and in the number of skilled technicians, the demand for services will rise in most geographical areas. While the severity and number of collisions will continue to decrease due to advancement in vehicle technology, the ratio of skilled panel and paint technicians to motorists will continue to degrade. So, in this situation, one would expect the cost of collision repair services to rise, right?

Wrong! In most other industry sectors you would be correct, supply and demand logic would suggest the price of services should rise, but not in our sector. Large insurers have such an enormous presence in the industry that they are able to artificially control the cost of services. By creating their own rates and times manuals and claiming they are “based on detailed industry research”, creating up to 3 year PRN agreements and by steering work into and out of repair establishments, these corporate giants have successfully manipulated the market rates for the last two decades.

So, what happens when a large corporation has the ability to control the market price of goods and services and the incomes of tens of thousands of Australian families? The corporation flourishes while the industry in question struggles to survive. Recent weeks have seen the dairy industry vs. the supermarkets battle appear in the media with dairy farmers and associations protesting and pleading for government intervention. The supermarkets are accused of driving down the price of milk to lure in consumers to the detriment of the small family owned dairy farmers struggling to survive on unrealistic prices paid to them for their products. The situation is very similar to our own, where we see insurers driving down the cost of premiums to win on-line clients while repairers go to the wall from being paid unrealistic labour rates for their work.

Who should be controlling and monitoring the situation? The Federal Government? The ACCC? The office of fair trading? Or, should the situation be left to run its own natural course?

When a corporation gains and wields such significant market power, its shareholders and the community should expect the corporation to act responsibly, ethically and to not abuse its position to gain unfair advantage over consumers or small businesses. If a corporation was seen to use its power and position to artificially raise the price of goods to make a profit, the ACCC would step in to prevent consumers being taken advantage of. But, where a corporation uses its market power and position to artificially lower the cost of goods it buys to make a profit, no government agency rushes to the aid of the small businesses and suppliers being taken advantage of.

Are PRN systems the tools insurance giants use to control and manipulate market prices? If so, should the ACCC be investigating their effect and the associated abuse of market power in the insurer/repairer relationship?

In the end, abuse of power and a shrinking repair sector will mean two things: lack of consumer choice and a lack of transparency in the insurance/repairer/consumer relationship. While the Insurers get wealthy off the back of mum & dad repairers, the consumers will be left with little or no freedom of choice and no neighbourhood repairer to turn to in a time of need.

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2 comments:

Anonymous2 April 2013 08:52
the big end of town has been abusing market position since the Dark Ages. As margins get skinnier and competition get tougher, they turn on their own suppliers to squeeze a few extra dollars out of the system. It’s just harder now in a global recession and with the industry the way it is. Greedy boards and CEO’s want to please share holders but not lose customers. Only way to do it is by milking us like they do the dairy farmers. Bill W.

Anonymous3 April 2013 09:44
The greedy insurers have been doing this to the repairers forever, nothing new. Cars get repaired to a substandard condition that end up costing the owner when it gets traded or sold. They should be sued for diminished value.