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To Bid or Not to Bid

Auction Web sites offer P&C carriers new options for finding the best repair costs and salvage prices, but the industry may prefer the status quo.

When Charles Stevens describes his online auction Web site, (MBX; Dania Beach, Fla.), he's quick to point out that it's not "just like eBay." But at a time when eBay is so popular that it's catching on as a verb (e.g., "I just eBayed my old CD collection."), the comparison could be seen as an accolade. What makes different is that it's designed as a means of transparency in the boat salvage and repair business - transparency that could lead to savings for insurers in repair costs, litigation expenses and time as well as better salvage prices.

"No credentials exist nationally or statewide to recognize the occupation of marine surveyor," Stevens explains. "Since surveyors are usually determining the price of salvage and repair, in many cases we must think about keeping the insurance company from being taken advantage of." With MBX, the marine surveyor, claims adjuster or designated agent posts a request for proposal (RFP) on the Web site. The RFP is an itemized damage survey with unlimited space for details and photos. Next, a database of more than 4,000 registered repair and/or salvage bidders are automatically notified of the auction via e-mail and the RFP is made available for review.

"We use MBX because the amount of exposure that we get on our vessels is unparalleled," says Tom Kula, marine claims analyst with New York-based International Marine Underwriters (IMU), a subsidiary of White Mountains Insurance Group ($264 million in net income for the first half of 2004). "This gets us a good return on the boats and we are able to turn the claims around very quickly, minimizing the time that our clients are out of money."

A History of Haggling

In this way the market determines the price for repair work or purchased salvage, rather than leaving the decision to two or three people, who are often at odds with one another. Bidders enter their lowest price for repair work or highest offer on salvage. Once the auction begins, the bids are automatically updated in increments, just like on eBay.

It would seem that the potential for savings and ease of negotiation are obvious. But, according to Stevens, the insurance population is largely resistant. "We typically have a hard time getting insurers to use our service," he relates. With no software to install and a flat fee of 5 percent of the lowest chosen bid for repairs and 8 percent of the highest winning bid for salvage auctions, the reason likely lies more in the industry's attitude than in the logistics of the service.

"There are entrenched ways of doing business here," says Matt Josefowicz, an analyst with Boston-based Celent Communications. "Historically these things have not been universally adopted because a lot of this type of business is done on a relationship basis, and companies tend to negotiate special terms so that the value of a transparent marketplace for salvage or repair services is not overwhelmingly obvious."

MBX's Stevens hopes the benefits offered by his auction site, however, will lead to change in the industry. He estimates that MBX's services can reduce an insurer's loss ratio on claims and adjusting expenses by at least 30 percent and by as much as 70 percent. Additionally, MBX provides guidance in the negotiations for claims handling.

"MBX helps us determine how best to settle the claim while minimizing loss to our client and ourselves," IMU's Kula notes. "The Web site lets us perform both salvage and repair bidding processes simultaneously so we can get an effective repair cost and match it up against the salvage market, creating more competition and allowing us to decide which is more economical."

Since all parties can view the agreement online simultaneously, each one can take action immediately to settle a repair claim: the boat owner can inspect the repair yard to make sure that repairs are satisfactory; surveyors can review repair procedures with the yard; and the insurer can pay the damages and check on the status of repairs, according to Stevens. "Now, we have control on the surveyor and the boat yard with clear parameters written up for each step until the work is finished," he says. "This allows insurers to maintain a lot of control and stop any potential for fraud."

Driving Salvage Values

Similar developments are occurring in the world of auto salvage sales. Copart (Fairfield, Calif.) runs an online auction site,, that gives insurers the opportunity to sell to salvage buyers from all over the world. "We open up the market to get insurers a higher return than a smaller auction would," says Jay Adair, president of Copart.

Using a preliminary bidding process, buyers inspect vehicles online and submit bids. When preliminary bidding ends, the highest bid is transferred to the real-time Internet sale as a starting price for the vehicle. Then, the real-time Internet bidding is facilitated by Copart's Web site using a Java Virtual Machine platform-independent execution environment.

"We used to let each of our claims offices sell their own salvage with their own vendors, but we took in a home-office strategy with Copart because there are too many problems in the salvage industry," says John Potratz, material damage manager for Jacksonville-based Kemper Auto and Home Group (more than $650 million in net written premium), a subsidiary of Unitrin ($7.5 billion in total assets). "An insurer puts a lot of confidence in a salvage vendor to abide by the salvage and titling laws, and this open online auctioning approach, from just one vendor, puts much more control in place." According to a report from Copart, Kemper Auto and Home Group has realized an additional $142-return per vehicle salvaged on Copart's site through June 2004.

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