Overcoming the biggest challenges in the auto insurance industry

The vehicle insurance industry faces plenty of headwinds in 2025, from rising repair costs to underwriting challenges with EVs and other increasingly advanced vehicles. There's also the all-too-common misconception that carriers are resistant to paying claims when the opposite is true—their primary goal is always indemnity, which means getting customers back on the road safely and protecting their pocketbooks in the process.

Despite these challenges, this is an exciting time for carriers. Direct repair programs (DRPs) can forge long-term relationships between carriers and shops that will streamline the repair process by speeding up approvals and reducing cycle times. Revolutionary technology like AI enables automated damage assessments, allows customers to file a claim anytime and anywhere, and improves customer service. Carriers have more ways than ever to help customers through the repair process and provide incentives that will improve acquisition and retention.

By taking full advantage of the resources at their disposal—from DRPs to next-generation tech like AI—carriers will be in a strong position to overcome their pain points and provide exceptional service for their customers.

A challenging time for carriers

The past several years have been difficult for auto insurance carriers. Vehicles have increasingly sophisticated software and electronics, which is driving up repair costs and making qualified labor harder to come by. While the supply chain crisis isn't as acute as it was a couple of years ago, shops and carriers are still contending with disruptions, a lack of parts for certain types of vehicles, and a shortage of skilled labor.

The CPI for vehicle maintenance and repair jumped by 10% from 2023 to 2024, and McKinsey reports that insurers are confronting 25 to 35% longer repair times. With new vehicles like EVs, carriers need to reassess issues like rates of depreciation, the availability of parts, and other issues that are relevant to the underwriting process. There is often friction between repair shops and carriers due to estimates that don't align with policies and the wrong sets of incentives—such as an overreliance on OEM parts and more expansive damage assessments for insurance jobs.

Now is the time for carriers to reimagine their relationships with shops and deploy emerging technology like AI to bring costs down and provide the best possible service for their customers.

Building the right networks

Conventional transactions between carriers and shops are hampered by a lack of alignment with specific policies and inconsistent quality, communications, and processes. This is where DRPs come in—when carriers have strong relationships with a network of trusted shops, they can process claims more quickly, reduce the workload for adjusters, guarantee that service is high-quality, and improve customer satisfaction.

DRPs allow carriers to negotiate pre-set rates for labor and parts while getting rid of hidden costs. This is especially important at a time when these costs are rapidly rising—as McKinsey notes, a "simple windshield replacement that might have previously cost about $300 can now reach $1,000 or more due to the integration of sensors and the requirement to recalibrate this equipment during replacement." Carriers can build a network of shops that offer the right expertise at the right price, which will keep costs under control and improve quality.

Carriers can't afford to just go to any shop and hope for the best. From repairs that don't align with policies to exorbitant storage rates, there are too many ways for these transactions to go awry. This is why DRPs will continue to be integral—we'll likely see larger carriers absorbing smaller ones with existing DRPs to expand their networks, as well as networks that go beyond body shops and extend to parts networks, mobile vendors, and so on.

How digital tools are transforming auto insurance

The auto insurance industry is in the middle of a sweeping digital transformation, from the use of vehicle telematics to offer safe driver discounts and other incentives to the deployment of AI for automated damage assessments, faster approvals, and even coverage reviews. Eighty-eight percent of large carriers say they either use or are interested in using AI for claims, fraud detection, underwriting, and loss prevention.

To take full advantage of this digital transformation, carriers need to integrate resources like AI with their broader strategic plan to build strong networks, streamline and accelerate internal processes, and cut costs. For example, subrogation is often too clunky and disjointed right now. By implementing a centralized digital platform for managing subrogation, carriers can more efficiently communicate with the relevant parties and establish agreements that offset costs. Digital tools like AI can help carriers with customer acquisition and retention by making applications, claims, policy reviews, etc. easier and faster. AI can also facilitate more efficient transactions with DRPs, making these relationships even stronger.

Although auto insurance carriers face many obstacles, they also have more resources than ever to make their operations more streamlined, build robust networks of partners, and get customers back on the road safely and quickly. The carriers that deploy these resources strategically will be in a strong competitive position in 2025 and beyond.