The current market for steel is tough worldwide, and insurancecompanies that deal with damage claims in this area are reallyfeeling the pinch. Steel can be damaged easily in transportation —either by way of marine, train, or truck — or while in storage at awarehouse that experiences a catastrophe, such as a fire or flood.In addition to these vulnerabilities, the price of steel is influx, and in order to be fiscally responsible, insurance companiesneed to find value in the damaged goods that they insure byreselling them.

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The Old Way

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When a steel shipment is rejected by a buyer, insurancecompanies typically are stuck with the bill. The insured must callin a surveyor to validate the claim, and, once the cause of damagehas been established, the surveyor tries to obtain the highestdollar amount possible for the damaged goods for the benefit of theinsured and the insurance company. More often than not, theinsurance company is taken advantage of, largely due to thesurveyor's inability to widely market the damaged goods.

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As selling salvage is generally a small aspect of a surveyor'sjob, surveying companies usually do not have the means or theexpertise to advertise and market damaged steel productsefficiently. Most sales are limited to a few brokers and possiblysome local distributors. In many instances, it is not completelyclear that a fair and honest process took place in order to net theinsurance company a decent return.

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New Approach

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The Internet spawned an innovative and disruptive approach tothe sale of surplus and secondary steel: online auctions. Thisdevelopment brought two completely new elements to this largemarket. First, it brought technology to a process formerly donestrictly through manual means. Second, and more importantly, itallowed efficient mass-marketing while providing a secure processthat is easily audited.

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Companies that use sites to sell excess and secondary steel haveprovided a viable and unique business model. Embraced by thelow-technology industry because it offers a compelling applicationof the Internet, this business model also offers a completely fairprocess for buying and selling salvage steel products. In addition,it provides an unlimited, non-exclusive supply of steel in a fairand competitive environment that showcases an accuraterepresentation of offerings.

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SteelSalvor is one service that has developed an online auctionsite that caters directly to the insurance industry. The totalaverage amount of steel auctioned each month is 5,000 to 6,000tons. Working on behalf of insurance companies and their agents,sites such as this are able to minimize insured losses on steelinventory in all types of claims, including marine loss,bankruptcy, and property and casualty.

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Case Study Makes Case

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For example, in 2003, a large international insurance companyfaced multiple large marine insurance claims. The underwriters weredealing with damages that occurred aboard two separate vessels thathad discharged imported steel in New Orleans earlier that year. Theclaims involved cold rolled steel coils that had been delivered tocustomers' facilities all over the Midwest region.

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The insurance company appointed a risk management specialist whomet with many companies to ascertain the best means of disposition.When asked what the deciding factors were in choosing a company tohandle this, the insurance representative stated that marketknowledge and a detailed plan to minimize losses were importantconsideration points. A reasonable fee and the ability to guaranteea high rate of return also were important aspects to consider whenmaking a decision, according to the representative.

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After breaking down the entire inventory list, SteelSalvorassembled multiple auctions, optimized by size and location, in amanner to encourage the most competition from the bidders for allof the material generating interest. The system worked, andSteelSalvor exceeded its original estimate to the insurance companyby 10 percent, which resulted in an additional $237,000.

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Looking Ahead

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Online marketing companies that specialize in auctioning metalsprovide a simple and cost-effective way for insurance companies andtheir adjusters to realize better returns on claims. It allows themto increase market exposure therefore increased the return on asale.

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Market demand continues to fuel growth in this new technology.In addition, there has been interest from insurance companies toduplicate the service in Europe and in other regions. Currently,companies are in discussion with service centers and domestic millsin the United States to handle the sales of secondary inventory andclaims. With companies such as SteelSalvor accumulating more than6,000 contacts in their database, it is clear that the onlinemarketplace is only getting bigger, and selling steel in the newmillennium is getting easier by the minute.

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Scott Dawson is President of SteelSalvor. He can be reachedat [email protected].

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