A warm, sunny May afternoon in Oklahoma City last year turned suddenly destructive. A large, supercell thunderstorm had quickly developed, producing softball-sized hail, winds exceeding 60 mph and hail drifts several feet deep. In what may have been the most violent and expensive hail storm in Oklahoma City history, five people were killed, and an estimated 10,000 cars and thousands of homes were damaged by the freak storm.
For auto insurers, unexpected disasters such as this lead to a rush of claims and the need to spring into action to help take care of their policyholders. This means a large number of cars will have to be repaired or recovered and sold at auctions, in order to limit the claims costs.
Speed to Market
A quick response to a disaster is vital for the livelihood of any insurance company. Insurers are relied upon most when disasters and catastrophes wreak havoc, but those also are the times when they incur their greatest expenses. That's why auto insurers must find ways to reduce the financial toll of a disaster by recovering as much value as possible through auctioning salvaged vehicles.
Speed is essential when it comes to getting a car sold at auction. Just like a new car that instantly begins to depreciate the moment it rolls off the lot, once a car is damaged, the clock starts to tick. From that moment on, the amount of time it takes to recover the car and get it ready for auction determines how much money auto insurers can recoup.
For example, following the Oklahoma City hail storm, damaged cars that were recovered and resold within 30 days brought in 57% of their pre-accident actual cash value. For cars that were sold between 60 and 90 days after the storm, the average gross return fell to 41%; and that figure was neatly halved for cars that took longer than 180 days to sell, with an average gross return of only 23%.
Knowing the importance of acting fast in a crisis situation does little without the ability and the structural framework to immediately spring into action. That's why it's vital for auto insurers to be prepared with a solid network of local, regional or national adjusting firms, restoration services, body shops and salvage and recovery companies. Insurers need to have good working relationships with these vendors, and ensure that they are qualified to and experienced with working in disasters.
If you can judge people by the company they keep, then you can judge an auto insurer by the quality of its vendors. Although these vendors are separate companies, to the policyholder they are associated with their insurer, and their performance becomes a reflection of their auto insurer.
During a crisis, when so many claims are being filed, auto insurers must be ready for any potential shortfall of resources. While none of this is cheap, and often requires overtime or "CAT" pay, being prepared with a competent and qualified network is far less expensive than the cost of failing policyholders and earning a bad reputation.
An unexpected disaster creates a sudden influx of salvage vehicles on the auction block-and may outstrip local demand, thus diminishing returns for auto insurers. But insurers can tip the supply-and-demand balance in their favor by going outside the local area to seek buyers. And one of the most efficient and effective methods to increase the pool of potential bidders from outside the local market is through virtual online auto auctions.
Traditional live auctions require the physical presence of anyone bidding on a car, which limits the buying pool and thus the insurers' ability to maximize their return. But because virtual auctions are conducted online, the cars at a virtual auction are available to buyers throughout the world, vastly increasing the pool of potential bidders, and likely increasing the sale price.
Another advantage of using online auctions is that they do not shut down in the event of bad weather or natural disasters. Because the bidding is done virtually, online auctions remain open for business, as opposed to physical auctions that need people to be live, on-site, and are often canceled due to inclement weather.
In these competitive economic times, it's important for auto insurers to use every revenue opportunity available to seek the highest return possible on salvaged autos. And if more auto insurers employ the strategy of a solid catastrophe plan, combined with a strong network of vendors and the use of virtual online auctions, it will be a shot in the arm to the overall auto insurance industry by creating more favorable markets and maximizing the value of all salvaged autos.
Vinnie Mitz is president of Copart Inc., Fairfield, Calif.
