As any insurer or business owner knows, catastrophes can strike on any front without warning. Marine and inland marine insurers, property and casualty insurers, adjusters, and brokers all have a very specific job to do when disaster strikes, even before claims start pouring in.

When the catastrophe passes, insurers are focused on getting their clients' businesses up and running again as quickly as possible. Unfortunately, relying on traditional techniques for salvage disposal, without structured processes, can leave money on the table — for both insurers and insured companies.

A designated catastrophe (CAT) team, which is typically composed of experts in a variety of fields (engineers, dryers, salvors, forensic accountants, and restoration specialists), facilitates a quick response when disaster strikes. CAT teams have the expertise needed to ensure that expenses are minimized and recoveries maximized, and are practiced at working together to get businesses back on track quickly. After disasters of any kind, be it natural disaster, fire, or flood, specialized CAT teams kick into gear and work with insurers to quickly process claims.

Response team coordination is key in catastrophe settings. Having qualified experts on the ground assessing damage and proposing solutions prevents insurers from having to rely on unknown local contacts to get the job done — likely at a higher price. CAT teams remediate the loss as cost-effectively as possible and provide structure during a time of crisis.

Differences Between Traditional Salvors and CAT Team Salvors

When insurers choose a salvor, in many cases, they are pre-determining the salvage-disposition experience they are going to have and, more importantly, their potential for recovery.

Most local salvors simply do not have the resources to operate efficiently and maximize recovery in catastrophic situations. They often deal with the same small local pool of buyers for salvage disposition and when the supply of salvage balloons (as it does after a catastrophe), local buyers' limited cash resources cannot keep pace. Locally, there is not enough competition or capital to drive prices up to fair market value. Many times, disposition is purely time-driven. Salvors are working as quickly as they can to get businesses back on track and do not take the time to generate demand for salvage, often selling it to the first bidder.

Even in ideal situations, when not under the stress and constraints of disaster recovery, traditional methods of salvage disposition do not typically provide the highest possible recoveries. Currently, it is estimated that less than 10 percent of commercial insurance salvage is sold in an open, competitive format. On the open market, salvage is usually sold through either a negotiated sale or a sealed bid process, typically conducted by surveyors, salvors, and adjusters. The buyer pool is typically restricted to small, local groups with whom companies have existing relationships. These limitations do not take advantage of a potentially global pool of buyers and reduce the opportunity to realize true market value.

The potential for maximizing recoveries is small for the remaining 90 percent of commercial insurance salvage that does not find its way to the open market. Most salvageable property is left with the insured, scrapped or destroyed. In many cases, salvage is left with the insured through a direct, negotiated claim settlement.

Additionally, in order to maintain control over damaged goods or to adhere to strict brand-and-label agreements, many insured companies have the right to retain the salvage under the protection of policy brand-and-label clauses or control-of-damaged-goods clauses in their insurance policies. While these clauses are appropriate for many product types, there are now acceptable and controlled solutions to eliminate the business issues giving rise them. Once these issues are remedied, the salvage can be offered to the open market and sold.

Utilizing a Global Marketplace

When creating a CAT team and researching alternative solutions for salvage disposition, insurers should look for solutions that dramatically open up the claim valuation process to a global marketplace. A successful marketplace allows sellers and buyers — including the insured actively bidding on their own salvage — to come together in a transparent environment where fair market value is determined by supply and demand. After fair market value is established, insurers have the option to settle the claim and simultaneously dispose of the salvage by selecting the highest bidder or reviewing all bids to make a selection.

Internet auctions allow an expansion of the bidding pool beyond regional players to a seemingly limitless pool of global bidders. A larger bidding pool creates more competitive bids, resulting in greater recoveries. This is especially true in catastrophic situations, when local bidders can quickly become financially drained. Web auctions allow salvage experts to create demand both locally and globally to help insurers realize fair market value for salvage. Many insurers have found that auctioning items over the Internet can bring as much as 50-100 percent increase in net recovery, compared to previous methods of asset disposal. Increased competition through an open bidding process contributes greatly to this phenomenon.

Financial gains are not the only benefit of auctioning damaged assets online. Web-based auction companies also provide a much-needed transparency into asset management and reporting. For example, conducting the auction online allows the insurer to log in to the marketplace to watch the auction in real time and see each bid. Additionally, most online marketplaces can record bidding activity and provide a listing summary report at the close of each auction. Finally, the auction company will aggregate client data that the client can compile into reports, facilitating compliance with government regulations, such as Sarbanes-Oxley.

Benefits of Alternative Solutions

The benefits of alternative claim solutions reach far beyond a cost-effective method for salvage disposition, especially in catastrophe situations. Salvage experts using online solutions take a methodical approach to each auction and each salvage item, no matter the circumstances. When catastrophes occur, these salvors utilize their time-tested processes and global resources to create strong demand for each item, even in tight time frames, like those demanded by retail goods.

Modern claim solutions allow insurers and their clients to avoid significant and costly liabilities, such as the requirement to remove salvage from remote locations, store the salvage for an extended period of time, or prepare the salvage for transfer or sale. Online auctions provide insurers with historical data on every transaction, allowing clients to analyze performance by adjuster, product category, or any other transaction attribute. With this information, insurers can make informed decisions on costly claim expenses, saving hundreds of thousands of dollars.

With the implementation of innovative loss mitigation strategies, insurers can make decisions strategically to resolve claims in ways that best balance speed, cost, and recovery — key considerations in catastrophic situations. Furthermore, insurance adjusters can provide irrefutable evidence of obtaining market value for salvage, thereby reducing expenses associated with challenges of the salvage recovery value used in settlements.

It is easy to see that innovative auction solutions offer many benefits to insurers. Those benefits are multiplied in disaster situations, when insurers' supplies of salvage increases and their need for salvage disposition is higher.

Increased Supply = Increased Demand?

Counter intuitively, many expert salvors have found that when the supply of salvage increases dramatically after a catastrophe, demand for salvage increases as well, especially for industrial, construction, and heavy equipment. This is, of course, in contrast to the law of supply and demand. It also flies in the face of common expectations of low recoveries of salvage following a catastrophe due to the sudden, dramatic spike in supply that cannot be absorbed by traditional buyers. Examining salvage practices in catastrophe situations easily explains the anomaly.

After a disaster strikes and the area has been stabilized, a period of recovery begins. Both new and rental equipment are quickly tapped for reconstruction, and once the available supply is depleted, construction companies look to new options to aid in rebuilding efforts. This is where catastrophe claims come in.

The damaged-but-repairable material-handling equipment, bulldozers, excavators, chassis, trailers, other heavy equipment, building supplies, and non-perishable food supplies that once may have been sold for half their worth are in high demand to help rebuild the disaster area. For example, after Hurricane Katrina devastated the Gulf Coast, one online marketplace generated more than 500 bids and $200,000 on the sale of damaged forklifts. If the conditions were normal, however, the inventory might have been a complete loss.

Through the work of an innovative salvor, salvage can be refurbished quickly and utilized in rebuilding efforts, maximizing recoveries for all types of insured losses.

Proven salvors employ specialized market makers that work to create real demand for items globally, to find buyers with budgets unstrained by the load of salvage created by the catastrophe. These local and global efforts ensure that local demand for industrial and material-handling equipment is met and also work to open claims to a global pool of bidders, ensuring that fair market value is realized for each claim. In this way, increased supply can equal increased demand, and insurers can experience significantly reduced losses — and headaches — after disasters.

Enhancing Claim Handling

Insurers are very practiced at mitigating risk, but many can further reduce their risks by adding advance catastrophe planning, including salvage disposition, to their arsenal of tools.

To remain competitive, insurers must continue to enhance all areas of the claim settlement process: total claim-cycle time, salvage proceeds, subrogation, and cost avoidance. Planning ahead for salvor services can ensure that insurers are taking advantage of the increased value of catastrophe-related salvage resulting from best practices in salvage disposition.

Daniel S. Parsley is president and CEO of SalvageSale, an online marketplace and salvor services provider for commercial insurance and corporate asset disposition needs. He may be reached at www.salvagesale.com or www.capitalassetsale.com.

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