Old habits are hard to break, particularly in the insurance industry. But when old habits are negatively affecting the bottom line, many companies welcome change. Current claim and underwriting practices, particularly those involving the handling of commercial salvage, are rooted in years of tradition.
Historically, companies deal with claims using the quickest and easiest means at their disposal. These practices often consist of destroying the salvage or negotiating to leave it with the insured. However, these methods usually do not result in the most beneficial settlement for the insured or the insurer. Companies do not fully maximize their salvage recovery returns, and the insureds are faced with increased loss ratios and higher insurance premiums. By implementing alternative solutions for salvage disposition, particularly online auctions, both insureds and insurers can realize significantly higher returns.
Current State of Salvage
It is estimated that less than 10 percent of commercial insurance salvage currently finds its way to the open market. When it does, salvage is either sold through a negotiated sale or a sealed bid process that is typically conducted by surveyors and adjusters. These traditional methods usually restrict the buyer pool to small groups and individuals in a local geographic area with which companies already have existing relationships. These limitations means that companies are not taking advantage of a potentially global pool of buyers, effectively reducing opportunities to realize true market value.
The possibility for meaningful recovery is significantly bleaker for the remaining 90 percent of commercial insurance salvage that does not find its way to the open market. In many cases, salvage is either disposed of or left with the insured through a direct, negotiated claim settlement. Negotiating with the insured narrows the marketplace to one — a disadvantage that is reflected in insurers' salvage returns.
Fortunately, this issue is easily remedied. Modern solutions allow for the creation of sophisticated and responsible approaches that can be customized to ensure that any existing terms and conditions are met.
Identifying Alternative Solutions
When researching alternative solutions for salvage disposition, insurers should look for solutions that dramatically widen the claim valuation process to a global marketplace. Successful marketplaces allow sellers and buyers, including insureds actively bidding on their own salvage, to come together in a transparent environment where competition is created and fair market value is determined. After fair market value is established, insurers have the option to settle the claim by selecting the highest bidder or reviewing all bids to make a selection.
Additionally, alternative claim solutions should include a customizable approach to meet specific needs, including finding and qualifying a buyer who will meet all requirements such as brands, labels, or CDG restrictions. Innovative marketplaces adhere to these agreements and protections by working closely with each insured to find a solution that protects their brand before the item is ever sold. For example, alternative claim solutions can confine the resale to specific national or world regions, remove all identifying markers for each item, and/or repackage the goods in generic packaging if required.
Online salvage auctions are quickly gaining popularity as a proven alternative claim solution due to their many benefits for insurers. Reputable 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. Auctioning items over the web can bring as much as a 50 to 100 percent increase in net recovery, compared to previous methods of asset disposal. Increased competition through an open bidding process contributes most to this phenomenon.
On demand web-based auction companies deliver a much-needed transparency into asset disposition and reporting. For example, conducting an auction online allows the insurer to log in to the marketplace to monitor the auction in real time and see each bid that is made. Additionally, the online marketplace tracks bids, documents all bidder information and amounts, and provides a listing summary report at the close of each auction. Finally, the marketplace will aggregate client data that the client can compile into reports for better claim management.
Benefits of Alternative Solutions
The benefits of alternative claim solutions reach far beyond being cost-effective methods for salvage disposition. Modern claim solutions allow insureds and insurers to avoid significant and costly liabilities, such as removing salvage from remote locations. The reporting capabilities of 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. Furthermore, adjusters can provide irrefutable evidence of achieving full market value for salvage, thereby reducing subrogation expenses through decreased challenges of the salvage recovery value used in settlements.
Underwriters are not the only parties reaping the benefits of alternative claim practices. Armed with a strategic salvage disposition solution and documented analytical data, insureds are beginning to see lower premiums as a result of reduced loss history. By handling salvage effectively, carriers can reduce claims to amounts below the deductible, which means these losses should not have a large negative effect on premiums. These benefits, specifically those of a reduced loss history, provide empirical evidence for brokers to use in an effort to differentiate their insureds' risk profiles during annual renewals.
Making Changes
Historically, underwriters have fully delegated all responsibility for conducting a salvage sale to surveyors and adjusters. To seize control of their salvage money, insurers and insureds must take more responsibility for how and where salvage is sold. When insurers realize higher recoveries for each claim, the benefits can be passed to the insured in the form of reduced premiums based on the insured's commitment to improve risk management practices and the resultant lower loss ratios.
Dan Parsley is the chairman and CEO of SalvageSale, an online marketplace and services provider for commercial insurance salvage and corporate end-of-life assets. More information is available at www.salvagesale.com.
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