I’m exhausted by Brexit, and I don’t think I’m alone. It’s been going on for so long now that I feel drained by the process and as a result, less engaged with what is actually happening, and therein lies the danger. Whilst it now seems leaving without a deal is less likely than it was, it is still possible and it strikes me that the impact of a no-deal Brexit on the claims supply chain is not well understood, nor is what we can do to mitigate it.
If we leave the EU without a deal, we will immediately transition to World Trade Organisation rules. Most commentators agree that in the short term this will lead to an increase in import costs of, for the sake of argument, let’s say 10%, mostly because of a weakening of Sterling. Although lots of cars are assembled in the UK (currently at least), relatively few parts are made here, not the windscreens or even the paint – the vast majority is manufactured elsewhere. Even those items that are made outside of the EU (so under WTO rules) are often distributed centrally via Europe and enter the UK under current EU regulations. So it seems reasonable that a no-deal Brexit will likely mean a 10% price hike for UK motor insurers on most parts, paint and glass used in the repair process, practically overnight.
We’re already seeing some opportunistic increases in the cost of some paint and parts in anticipation of Brexit that are close to that figure. So insurers’ costs are likely to go up and I suspect, given the highly competitive nature of the motor insurance market, so will premiums.
However, the real danger of a no-deal Brexit is not the additional inflation caused by currency, but in the delays likely to be caused in the import process and the consequences of these delays.
Anyone who has ever been stuck in a car full of children queuing at Dover during half term may be forgiven for not knowing that the UK operates a ‘friction-less border control system’. In practical terms this means that less than 3% of inbound vehicles are inspected on entry into the UK. Under a no-deal scenario, 100% of goods become subject to border checks. According to an Imperial College study commissioned by the BBC, an additional checking time of 1 minute, would create a queue of traffic 10 miles long from Dover and Folkestone, 30 miles if the check took 4 minutes. HMRC has produced Transitional Simplified Procedures that will allow registered businesses to import goods from outside the UK without making a full declaration at the port, instead making a retrospective payment within a month of the import taking place. This process is itself new and will doubtless have its own teething problems and delays, so it seems unlikely that it will be universally adopted by the 29th March.
How will those long queues translate into delays in the supply chain for repair? That supply chain is based almost entirely on Just in Time methodology. The stock of parts held in the UK is typically around 3 days’ supply at any one time. At a recent Brexit Summit hosted by the National Body Repair Association, global OEM, Non OEM and Paint manufacturers seemed relatively sanguine about the change. They are stockpiling the parts they are likely to need most, such as major components, to try to carry sufficient stock here to cover what they foresee as an estimated delivery delay of 4 – 8 days. Of course these types of changes are nothing new for these global players who have to cope with very quick changes in border regulation, as part of their day job. All of these manufacturers said the extended stocks they will hold to cover the delays will be for items they know they can sell. Not the full inventory of every last part, trim and decal that will be required to complete a repair.
Further down the supply chain, the concerns were much greater with body shop owners. The likelihood is that a significant proportion of repairs will not be able to be completed in the normal time frame because only major components, some paint and some glass will be available creating a host of problems for repairers:
- If the repair is not complete it can’t be invoiced and the body shop can’t be paid. Cash flow in the body repair sector is very tight already. Estimates vary, but there was a consensus that if some payments were delayed by between 2 to 4 weeks, then significant numbers of these businesses will fail; some thought up to a third of 1,500 body shops in the insurance chain. (Incidentally, the people making these gloomy forecasts own large and relatively well-funded businesses, but even they thought that a 6 week delay would finish them too).
- Most repairers are obliged to provide replacement courtesy vehicles; the supply of these courtesy vehicles is likely to run out as cars remain with customers whose vehicle repair cannot be concluded for want of parts. The repairer is normally obliged to hire in additional vehicles in these circumstances exacerbating the cash flow problem.
- The slow-down in the repair cycle means that the available space for vehicles awaiting repair will soon be taken up and then overwhelmed. Body repair facilities do not run with spare vehicle storage capacity – they can’t afford it.
- If delays become commonplace it is likely that some vehicles will have to be released from repair when they are road worthy but not complete in order to create space; this presents a problem as to when the excess for the repair should be collected and the repairer paid, as well as a logistical challenge to get the customer back to finish the repair.
- Contact with customers will have to increase; complaints and associated cost will increase too.
- Many repairers have stringent contractual key to key times that influence the amount they get paid for each job, so not only are they likely to be paid later because of a no-deal Brexit, they are also likely to be paid less.
- Third party repair costs will increase in line with these changes but credit hire costs in particular are likely to extend significantly, especially for immobile vehicle hires. Friction around the settlement of these claims will increase.
- Demand exceeds supply in the body shop sector already, a contraction of the number of body shops in the market will mean costs increase.
All of this makes for pretty grim reading: increased cost, increased delay and unhappy customers who are likely to have a far worse customer journey and likely have to pay more for it too. So what can we do about it?
My own view is that we are a more resilient industry than perhaps some of the above might suggest and we will be able to adapt to the new rules of the game relatively quickly, provided we communicate effectively with our suppliers and our customers early enough. SLAs can be changed, repair priorities triaged, payment cycles speedier up, recycled parts already in the country used in lieu of new (where the customer wants this), cash in lieu payments used more, non OEM and aftermarket parts with greater availability considered, vouchers for public transport issued or preferential excesses for customers who can do without replacement transport entirely. With enough imagination and determination, these problems can be overcome; but pretending they are not going to happen if we leave without a deal, or that they are someone else’s problem to deal with, could lead to some very long term damage that takes far longer to fix than it needs to.
Gary Barker
ERS Claims Director
