Keeping ahead of the game in the fiercely competitive motor insurance market is never easy, and many insurers are now examining ways of saving costs through the supply chain, so could online salvage auctions be the answer? Sam Barrett investigates
Competition in the motor insurance market has forced insurers to look for cost savings throughout the supply chain. While various bodyshop models have been introduced to control the cost of repairing vehicles, online auctions are helping insurers trim the cost of dealing with salvage.
The first online salvage auctions took place in the UK in 2001, although the market has really gathered momentum in the last few years as more providers shift to the online model and overseas companies such as US giant Copart enter the market.
Today, online auctions account for the lion's share of salvage sales. Piers Wilson, head of market development at Bluecycle, comments: "A couple of years ago about 20% of salvage was sold online. Today it's around 60% and likely to grow further. It's not inconceivable that online auctions will account for all salvage sales one day."
This prediction is not surprising given the advantages selling online brings to all the parties involved. Peter Millis, head of motor damage at Fortis UK, is in favour of the move online. "We've been using online salvage companies for around six years and although we did use a company that ran physical auctions in the past, six months ago we decided to go completely online," he explains. "It's definitely driven some cost out of this part of the business."
Cost savings come from a number of areas. For starters, vehicles tend to sell for a higher price online than they do at physical auctions. Andy Warren, head of motor supply chain at RSA, says he has seen the price vehicles achieve increase since moving to online salvage company Copart. "When we switched to online auctions the price we got for vehicles increased. On average prices were around 12% higher than through traditional auctions, although this has fallen slightly due to the economic situation."
The key reason for the price uplift is the wider audience that online auctions can attract. "Buyers like online auctions," says Sara Stainsby, sales and marketing director at Copart UK. "They don't have to stand out in the cold and can bid from the comfort of their office. Subsequently, we get a lot more people visiting our online auctions than you could ever get at a traditional physical auction. This helps to increase the price."
For example, Copart UK has 150,000 buyers around the world, of which 47,000 are in the UK, while Raw2k has 23,000 registered buyers in the UK. Additionally, at any one time, Bluecycle can have as many as 10,000 potential buyers on site.
Extending their audience further still, some online auction houses also allow overseas buyers. For example, RSA sees 20% of its vehicles going overseas. "When we used salvage companies with physical auctions everything used to go locally but we now see a lot going out to places such as Eastern Europe and the Baltic States. They want cheap cars and they're happy to repair vehicles," explains Mr Warren.
Not only do the vehicles reach a wider audience but, because buyers' details are held online, they are more thoroughly checked. "I've been to physical auctions where buyers wave a gas bill to prove their identity. We identity check everyone so we know exactly who we're selling to," says Mr Wilson.
This also means that where there is a restriction on who can buy the vehicle, only eligible buyers can bid. For example category A or B vehicles need to be disposed of correctly so only companies with the necessary licences would be able to bid.
Mr Wilson also believes that being online makes the auction fairer. "I recently visited a massive salvage auction in the US and there was a lot of evidence of collusion among the bidders. Subsequently, everything was being sold for small money. This can't really happen online," he explains.
Because online auctions can be run at any time, the cycle time from accident to sale can be much shorter. Once notified by the insurer, a vehicle can be collected in anything from one to three working days, depending on the contract. The vehicle will then be listed for up to seven days, with payment settled shortly after the end of the auction. "It's a much faster sale than you can get through a traditional auction," says Mr Warren. "In the past we might have waited until we had 20 high value vehicles before they went to auction. But, while we're waiting they're depreciating in value. Speed of sale is important. You can get a whole percentage decrease in value over a week."
This speedier turnaround has also meant better service for policyholders. "Before we used the online salvage companies it wasn't uncommon for a policyholder to tell us that although their claim had been settled the vehicle was still on their drive. This doesn't happen any more," Mr Millis explains.
As well as reducing the length of time before the vehicle is sold on, online salvage firms can also be called upon to fulfil the role of the insurer's engineer. Jason Stinson, director of Raw2k, explains: "Sometimes, rather than calling out their own engineer, the insurer will ask us to supply a detailed damage report and photographs. This does save them money but it tends to be in the more blatant cases where it would be uneconomical to repair the vehicle."
The other advantage of dealing with these online auction companies is the scale of their operations. Being national they can pick up all of an insurer's salvage requirements, which brings further savings. Mr Millis adds: "We do see lower costs as a result of this. For instance, a smaller outfit might send its truck to pick up one vehicle on a Monday, a second on a Tuesday and so on. But because of the numbers involved these larger companies can arrange pick up much more efficiently."
It's also much cheaper to run an auction online than it is to hold a physical auction. Although investment is required in technology, staff costs are lower as the company doesn't need to have staff on hand to prepare and move vehicles into the auction. Likewise there is no need to provide customer-facing facilities, such as a canteen and toilets.
Additionally, because everything is online, insurers can have greater control over the process. Systems can be fully integrated to enable swift payment and access to management information. Ms Stainsby explains: "Insurers have a lot more visibility throughout the sales process. They can see how lots are progressing and the price they achieve. This means an insurer's total loss staff can manage everything online."
This type of information is also used by the salvage companies. "We do a lot of studies into the data to help us maximise the price we get for vehicles. This can highlight the best times to list certain vehicles," says Mr Wilson. "It also gives us an insight into our customers and can help tailor the way we communicate with them. For example, for the buyers who like to bid at the last minute we'll send them a text at this point to remind them. There's a lot of science involved in online auctions."
With online auctions becoming increasingly common, there's likely to be a bit of a shake-up in the salvage market as smaller providers find it more difficult to compete. "The only way the smaller companies will be able to survive is if they specialise, either going into one area of the market, such as breaking, or look after a particular type of vehicle, such as vintage cars," says Mr Warren.
Consolidation is another possibility with several of the online players a product of this themselves. For instance Raw2k, which started trading in March 2001, was formed by several traditional yards consolidating. Likewise, Copart, which has US roots, entered the UK market in 2007 by acquiring and merging four existing salvage businesses including Universal.
Not every salvage company will need to consolidate or build its own website though as some of the larger players will host their vehicle sales for them. For example, Bluecycle launched Forecourt a couple of years ago to enable smaller salvage companies to create their own online stores in much the same way as shops sell through Ebay. "We have around 80 sellers on the site and would be happy to work with more," says Mr Wilson.
But while predictions of market consolidation may be in the air, the British Vehicle Salvage Federation is upbeat about prospects for the market. "Online auctions haven't affected the market detrimentally," says Alan Greenouff, chairman and secretary general of the BVSF. "They're a good, efficient way to sell vehicles and with the online auction houses offering smaller companies the opportunity to feature on their sites, everyone can benefit. However, I don't think we'll see everything going online: there will always be room for the traditional, physical auction."
Dane Loosley, divisional claims manager at Allianz Insurance, agrees. He uses a variety of salvage companies, both online and traditional, and believes this best fits his needs. "It gives us a choice as to what we want to achieve," he says. "Not just in terms of revenue but also in speed of disposal, customer service and regulation. There is just as much room for the niche market sellers and buyers as the large volume players: the more the merrier in my view."
There are two main models for online salvage auctions - live auctions run online and ebay style auctions where each item is listed individually with an auction deadline.
The first type, which is used by Copart, involves staging an auction online where buyers are able to bid on each lot in turn. "We run an auction every day at midday with an average of 700 vehicles for sale. Everything is posted on the site up to seven days before the auction so registered buyers can see what's available and then we take bids on each item in turn until it sells," explains Sara Stainsby, sales and marketing director at Copart UK.
The second type is very similar to an Ebay auction and is used by the likes of Bluecycle and Raw2k. With this, once a vehicle is cleared by the insurer for auction it will be listed on the site. "We'll include images showing all around the vehicle, its interior and any damage. We'll also state the damage and the category of the vehicle," explains Jason Stinson, director of Raw2k.
Vehicles will then be listed for up to three days and will be available for inspection by potential buyers if required.
Bids can be posted at any point right up to the auction's close and some sites have introduced an automatic extension feature. Piers Wilson, head of market development at Bluecycle, explains: "If someone places a bid in the last minute of the auction we will automatically extend the auction by one minute to allow further bids. During this extension only those people who have bid in the last five minutes will be able to place a further bid."
Whichever the model, once they win an auction, customers have a number of days to pay for the vehicle followed by a number of days to collect the vehicle. For instance Raw2k gives customers seven days from invoice to pay, followed by a further seven days for collection.
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