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...