9/14/2010

Salvage and Resell

Insurers that establish a salvage and resale network ahead of time can beat the weather every time.

By Vinnie Mitz

Still in the heart of hurricane season, auto insurers can be excused for feeling a little anxious. In the aftermath of hurricanes Katrina, Rita and Wilma in 2005, between 500,000 and 600,000 flooded vehicles were deemed a "total loss," resulting in tens of millions of dollars in costs to insurers. Preparing for these disasters can mean the difference between recovering those costs quickly and having vehicles languish in auto salvage yards—sometimes indefinitely.

In a disaster situation, such as a hurricane, there is an immediate chain of events that occurs. First, police, fire, emergency and military authorities work their way into the affected areas as the waters recede. Their first objective is to save lives, then to secure the area from dangers such as natural gas, gasoline, electrical lines, chemicals, fire, and other hazards. Following these actions, flooded and damaged vehicles can be recovered.

Salvage professionals and tow truck drivers are called up to clear the streets. Many flooded or damaged vehicles tend to be left in place for an extended period of time while residents begin to notify insurers of claims. The salvage companies, insurers and government work together to set up temporary storage locations where insurers will validate coverage, assess vehicle damages and settle claims as appropriate. Total-loss vehicles are assigned to salvage companies for resale, while uninsured and abandoned vehicles are towed to municipal holding lots and held until reclaimed or eventually disposed of.

Building a Catastrophe Network
The first step in preparing for a natural disaster is to assemble your catastrophe network: a solid group of business partners throughout the country with whom you can coordinate at a moment's notice. Much of the process in the aftermath of a disaster requires the insurance company to interact with service partners, adjusting firms, restoration services, rental firms and salvage companies. They must ensure that their partners are qualified and capable of supporting them in a catastrophe; this is when the insurer's reputation is most at risk with its customers, and it cannot afford any missteps.

Under normal circumstances when dealing with damaged autos, an adjuster would simply call a repair shop or salvage yard to have a vehicle towed. But this isn't so easy in the wake of a disaster. In the case of Katrina, there weren't enough tow trucks and drivers locally available to recover all the damaged cars in a timely fashion—so the vast majority of the cars sat and fermented.
Auto insurers need to be prepared for such a shortfall of resources in times of crisis, and that's where an efficient and experienced salvage partner becomes critical. With a national network of resources, salvage professionals can have tow trucks sent in from other locations to help meet demand. While importing professionals from outside the area involves paying workers at a higher than normal catastrophe pay rate, this is less expensive than the cost of losing your customers and ruining your reputation.

Because there are so few available tow trucks, it's also important to deploy spotters to first locate and report any damaged cars. Using mobile devices, spotters record a vehicle's identification number and its exact location and send it on to the appropriate database to update the salvage company and tow truck driver.

When it comes to flood-damaged automobiles, insurers should also have a plan to begin the remediation and restoration process immediately. Flooded vehicles deteriorate rapidly in condition and value, and the longer water is in a car the more damage it does. Early remediation and restoration of flood-damaged vehicles can add thousands of dollars to their salvage value. As soon as possible, all fluids should be drained and replaced, and a process to "flush out" the entire vehicle and the engine should be completed. While this quick stopgap remediation does not restore the car to showroom condition, it halts the deterioration until final disposition is made to a dealer who can professionally complete it. When dealing with flood-damaged cars, auto insurers need partners who are in compliance with EPA regulations for the disposal of hazardous waste, such as the oil and transmission fluid. Also, because floodwaters may carry contaminants and chemicals from the properties it destroys, consideration should be given to the safety of those who will come in contact with the contaminated vehicles.

Expanding a Depleted Market
Once the recovery and remediation of a car is completed, it's important to get the vehicle to market for resale as quickly as possible—particularly after a major catastrophe has devastated an area. In any given market, there is a natural threshold for how many cars can be sold at any given time, and this is exacerbated during a catastrophe since, often, more cars are put up for sale than the local market can absorb. A glut of cars on the market drives prices down, causing auto insurers to lose value on every car they've gone through the process of recovering and remediating.

That's why it's important for auto insurance companies to have regional, national and international exposure to expand their resale market for salvaged autos. One effective method many auto insurers are using nowadays to achieve that exposure is through online salvage auto auctions. Because it's all done online, salvage vehicles at a virtual auction are available to buyers throughout the world, providing insurance companies with access to a larger pool of potential bidders. Instead of being at the mercy of a buyer's market in the wake of a catastrophe, insurance companies can maximize the value of each car they sell.
For example, in the aftermath of Katrina, Louisiana was a terrible market in which to try to sell a salvaged car. Not only was the market overloaded with cars, but the buyer pool was greatly diminished by the permanent evacuation of tens of thousands of people from the area. Of those potential buyers still left throughout Louisiana, many were either wiped out financially or had no access to capital. In this situation, an online auto auction is able to bring the market from all over the world to any place a disaster strikes.

Another advantage of using online vehicle auctions to resell autos damaged from a catastrophic event is the fact that online auctions are impervious to bad weather and natural disasters—no storm, flood or earthquake has yet to take down the World Wide Web. Online auctions take place even if no one can attend the auction in person, and an auction that might have been canceled due to bad weather can still be held. In fact, when a hurricane threatened the Tampa area a few years ago and almost 2 million people were advised to evacuate the west coast of Florida, hundreds of cars were sold at an online auction that otherwise would have been canceled.

When a major catastrophe strikes, there are many variables insurance firms need to consider. But whether you're a large insurer with the resources to have your own national and regional teams of professionals, or a smaller firm that relies on a network of independent contractors and partners, it's vital to be prepared for the next devastating event. The unpredictable will still occur in any disaster or catastrophe, but having a well defined strategy and a highly skilled team in place will help ensure that, when customers are in their time of need, their insurance provider will be ready for them.
Vinnie Mitz is President of Copart Inc., a leading online vehicle auction company. For more about Copart, visit www.copart.com.


Vinnie Mitz is President of Copart Inc., a leading online vehicle auction company.

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