Agents can save money for clients
by using salvage after a loss
By Len Strazewski
SalvageSale, Inc., Chairman and CEO Daniel S. Parsley at the Port of Houston. Accidents loading or unloading freighters often provide goods that are posted at the SalvageSale Web site, www.salvagesale.com.
A multi-truck highway mishap. A train derailment. An office or warehouse fire.
Agents and brokers are usually the first to hear when these typical property disasters befall their clients, but when they get that fateful call, there's only so much they can do to help.
They alert insurers, contact an adjuster if an underwriter asks them to, and try to provide as much personal support as they can until claims compensation is ready. But a loss is a loss and that's the way it is.
Not necessarily. A growing number of agents and brokers are working directly with a new, high-tech salvage company to preempt total losses even before they happen and mitigate losses even before a claim is completed.
Bruce Jefferis, managing director of Aon Natural Resource Group in Houston, Texas, says his division of the global brokerage has been working with SalvageSale.com, also in Houston, to incorporate salvage into client risk management programs and use the salvage process to reduce claims and, as a result, property/casualty insurance rates.
By being proactive with a salvage plan in anticipation of losses and responding quickly after a loss with effective salvage of damaged goods or disrupted shipments, clients have been able to reduce their net loss from a mishap and the total claim against their insurance policies. In some cases, clients were able to keep large losses within their self-insured retentions or deductibles and completely eliminate charges against their loss ratio.
In this time of high rates and hard markets, salvage has turned into real premium savings, Jefferis notes.
The connection between the insurance industry and salvage isn't a new idea. Salvors have been working with insurers since Lloyd's of London underwriters sold the salvage from shipping industry claims to recover their losses. There are about 8,000 independent salvage brokers in the United States, drawing much of their business from the insurance industry.
According to Carroll Estes, president of the American Salvage Pool Association in Glendale, Arizona, a trade group that represents more than 100 group salvage pools in about 200 locations nationwide, members receive about 95% of their business from the insurance industry.
Estes, also president of the Central Texas Salvage Pool in Temple, Texas, says most of the salvage comes from the "day-to-day grind" of traffic mishaps, freight losses and home and industrial fires.
Recovery varies by material, but generally insurance claim recovery rarely exceeds 30% of original value.
Salvors generally work directly with insurers attempting to mitigate their net loss from a claim or with adjusters working for underwriters or self-insured corporations, Estes says. Agents and brokers have not generally been not been part of the salvage process.
At distribution centers across the world, there are similar sights of containers waiting for successful allocation or, perhaps, a mishap that could result in their contents making it to SalvageSale.com.
But, Aon's Jefferis says that this traditional relationship is changing as new technology expands the scope of the salvage marketplace and increases the opportunity for increased return from salvage sales.
"In the past, brokers didn't pay much attention to the salvage process. It was pretty much a local activity with a limited return," he says, and considered incidental to the risk management and claims process. However, three years ago, SalvageSale.com changed the outlook for salvage with the introduction of an Internet-based online auction process, he says.
The new salvage company combined its extensive and growing international database of more than 38,000 salvage buyers with an online sales technique similar to eBay, the Internet auction for collectibles.
BidXchange, the company's trademarked and proprietary auction process, allows sellers to list property for sale on the company's Web site (http://www.salvagesale.com) and watch, in real-time, as the company conducts an anonymous auction among international buyers registered with the company.
Buyers maintain an escrow account to secure their bids and guarantee payment for any successful purchases.
This auction technology has completely transformed the salvage process and helped turn salvage into a risk management and claims management tool, explains. SalvageSale.com President and CEO Daniel S. Parsley.
"In the past insurance underwriters and adjusters managed the salvage process, relying on a local market and the two or three bidders in their area," Parsley explains. "Salvage brokers had limited opportunity to build a broader market and limited expertise in the material involved or the broader market for its use." The size of the potential salvage market and the advent of Internet-based auction technology created a tremendous opportunity, Parsley says.
In November 1999, SalvageSale.com was founded, acquiring the assets of a 10-year-old salvage company and in 2000, the company completed a
$17 million investment offering, primarily from Securitas Ventures LP, the venture capital affiliate of Swiss Re Insurance Group and Credit Suisse; Merrill Lynch Ventures and American Re, a member of the Munich Re Group.
In June 2002, the company launched its auction process and related services that include limited site assessment, damage evaluation, inventory preparation, brands and label protection, transportation and storage, site cleaning, disposal of stock, value verification and sales of stock.
A growing number of agents and brokers are working directly with this new, high-tech salvage company to preempt total losses even before they happen and mitigate losses even before a claim is completed.
The company also established its auction categories which include: agriculture; aviation; building materials; chemicals and minerals; computers and components; food and beverages; machinery and equipment; marine (boats and ships); metals; plastic and rubber; pulp and paper; retail goods textiles; and transportation and parts. Within those categories, the company has marketed a wide range of material, ranging from copper metal concentrates to a shipment of shrimp exposed to temperature fluctuations and refused by its original buyer.
In August, SalvageSale.com listings included a shipment of computer monitors, a railcar of door "peepholes," 100,000 units of nail polish and two truckloads of Jurassic Park paper party goods.
Though it provides a full range of salvage-related services, the auction and the database of registered buyers that supports it is the cornerstone of the company, according to Parsley.
The nature of the process as a Web site posting allows the company to standardize information about material available to the auction and communicate the information to thousands of potential buyers who have already established their interest in the category of material. The seller stipulates minimum pricing and times for an auction to be conducted. Minimum value of goods for auction participation is $25,000.
Registered buyers receive an
e-mail whenever an auction is scheduled in their favorite categories and are invited to participate--a simple step that, on its own, dramatically expands the potential market for salvaged goods, Parsley says. Participants in recent auctions have included buyers in the United Kingdom, Belgium, the Netherlands, Pakistan, India and Turkey as well as the United States.
"At most traditional salvage auctions, sellers usually are limited to two or three bidders. Using the online auction technique we've been able to attract 70 to 80 bidders for some auctions, a dramatic increase in competition and the resulting proceeds," he says.
When the auction is conducted, participants submit sealed and anonymous bids through the Internet and can watch the posting of the bidding order on the company Web site. Buyers are blind to the value of the highest bid and the names of other bidders but can check the order of the bidding and know where they stand in the process.
The auction continues for a specified time but is automatically extended by 10 minutes if a new highest bid is received within the last 10 minutes of the auction and is extended again if a new highest bid is made. If there are no new top bids in that period, the auction closes.
SalvageSale then notifies the highest bidder of the results and automatically issues a request for payment within 48 hours. The payment is deposited in an escrow fund and released when the goods have been received by the buyer. Auction posting is free. SalvageSale receives a commission on sales ranging from 8% to 12.5%, depending upon the size of the auction proceeds.
Parsley says that insurance companies and adjusters are a big part of the company customer base, but a growing number of agents and brokers like Aon's Jefferis have become more involved in salvage as SalvageSale has proved the reliability and consistency of the process as a loss mitigation tool.
And not only are they using the concept after a loss, but they also use it as part of a risk management contingency plan.
"More and more agents and brokers have told that they have been including a discussion of proactive use of salvage in their proposals to underwriters and have gained consideration in ratings," he says.
Parsley adds that loss salvage isn't the only application of the auction process. Sellers have also been using SalvageSale to reduce overstock and overproduction and market equipment and other goods near the end of its originally intended use.
For example, in August, the company auctioned several garbage trucks slated for replacement by a waste management facility but still usable by smaller companies and overseas operations.
A good general business tool for commercial clients, says Aon's Jefferis, even if those services don't directly relate to insurance and risk management. "Most businesses have surplus goods, equipment and furniture that just goes to waste when it is replaced. Why not turn it into income," he says. "We used it ourselves to market office furniture when we remodeled our own offices recently," he points out. *