Auto insurance premiums account for almost one-third of Europe’s €250 billion ($249 billion) property and casualty business, and repair payouts can run as high as 68 percent of those premiums (Exhibit 1). Until now, managing the cost of repair claims has been lower on the insurance executive’s list of priorities than other revenue-generating and cost-reduction measures. But that is changing, for several reasons.

The ability of insurers to increase their premiums is declining as a result of more intense competition and the commoditization of basic products, and the stock market downturn has cut returns from asset management. In response, insurers have mostly brought the cost of claims administration under control and actively fought the rising cost of bodily-injury claims. Another significant area, which holds the promise of large savings, is car repair payouts. Recent regulatory changes and Internet tools are giving auto insurers the ability to control this expense by using their buying clout to develop and monitor networks of preferred repair shops. Among the auto insurers whose repair networks we have investigated, net claims-payout reductions average 3 to 5 percent and sometimes rise as high as 8 percent.

Europe’s auto insurers have been trying to establish preferred repair and parts-supplier networks since the late 1980s. But these efforts have been limited by car manufacturers, which in Europe have a tight grip on the auto repair industry, as their warranty conditions require that cars be repaired at certified workshops using only original parts from the manufacturer.

In the past, auto insurers, despite their large repair volumes, could do little to steer business to repair shops of their own choosing. But EU regulations passed in October 2002 (to be phased in during the ensuing 12 months) will limit the right of manufacturers to deny certification to repair shops for any reason other than the quality of the work they do. Consequently, more repair shops can now obtain certification, and all of them are going to have greater freedom to choose their spare parts from a wider range of manufacturers.

As the largest indirect purchasers of car repair services and spare parts, European auto insurers will be in a better position to use their enormous buying power to negotiate discounts from repair shops and parts suppliers. By organizing them into networks of preferred providers, insurers will be able to reap the benefits of volume discounts, higher service quality, and greater customer loyalty. Moreover, a well-designed repair network can cut claims costs by more than 20 percent as compared with a system that gives claimants free choice (Exhibit 2).

The Internet will play an increasingly important role in the success of such networks. Until now, the repair industry has lacked transparency, mainly because its customers had to deal with several hundred independent repair shops: an insurer, for example, had difficulty managing the selection process for its network and monitoring its partners’ activities. To help overcome these problems, a few European insurers have introduced World Wide Web—based systems linking claims adjusters to repair shops. These systems not only give customers and insurance inspectors real-time updates on the repair process, including live-cam views of cars under repair in garages, but also feature on-line auctions of spare parts and totally wrecked cars (Exhibit 3). The cost of customizing and adapting such systems to the specifications of individual big insurers can be as low as €1.5 million.

An insurer can use Web-based reverse auctions to choose repair shops for its network on the basis of their hourly labor costs; in one case, such an auction produced savings of 16 percent as compared with previously prevailing rates. To steer customers with claims to the selected workshops, advertising for a repair network can be combined, after an accident, with the use of a call center, whose employees would suggest a convenient affiliated garage and towing service. Insurers should also develop networks of parts suppliers that offer volume discounts and greater control over the source of parts. Information-management systems can monitor incoming claims, customer satisfaction, and repair times as well as data from individual repair shops.

Now that the EU regulations are being phased in and an Internet-based monitoring technology has been developed, the basic conditions are in place for auto insurers to build or reshape their relationships with providers of repair services; little can be gained by waiting for the market to settle. Insurers that act now can count on a sizable decrease in their claims payout costs—up to €200 million for large companies—and improved customer satisfaction to boot.