Salvage Returns vs. Parts Availability
For years, the interdependency between total loss frequency, salvage recovery rates, and the use of recycled parts has been a subject of interest to the collision repair industry, with different constituents having different perspective on the above-mentioned relationship. Insurers, collision repairers, salvors, and dismantlers each assert that the others’ business practices negatively affect their customers and profits, with the end victims apparently being vehicle owners, who ultimately pay the price in higher insurance premiums.
Mitchell International conducted a series of interviews with various industry participants to compile a list of the ten, most commonly held beliefs/assumptions in this area. The next step was to verify or challenge these assumptions by researching the facts of the matters using a mix of sources such salvage pools, collision repair shops, insurance carriers, and independent adjusters. We expect our findings, which appear below, to be of interest to many:
Assumption: The average repairable estimate total is increasing significantly.
Average repairable estimate totals have changed very little between 2004 and 2006, and have actually decreased 4% ($92) since 2003, though increasing slightly the past three years.
Assumption: Most collisions are front impacts and are often declared total losses
We analyzed several thousand repairable and non-repairable vehicles looking for a correlation between the point–of–impact and the total loss rate. Our analysis revealed vehicle impacts are distributed as follows, and more-or-less as expected:
Point-of-impact had a significant effect on the likelihood that a vehicle would be totaled. The data showed that fifty percent (50%) of front-end collisions get totaled, twice the rate at which rear-end collisions result in totaling, and nearly four times the rate for side-impacts. Our appraisal analysis and industry surveys confirmed that air bag deployment, power train damage, and extensive (and expensive) front-mounted electronic components can quickly total out a vehicle in a front-end collision.
Assumption: Total losses ratios are increasing every year
We looked at total loss rates for several carriers across the US from 2003 through 2005 and found that—in 2003—the state total loss rate varied from 10% to over 26%, with the majority of states (31) falling in the 16–20% range, and only one reporting total losses at 26% or higher. By 2005, twelve states were reporting total loss rates of 26% or more, with only five states continuing to report “low” total loss rates. Our research confirms that most carriers have experienced a steady increase in total loss rates of 1% (or 5% marginal growth) each year over the past several years. Some carriers
have attempted to mitigate, or even reverse this trend by searching for economically viable ways to repair more vehicles.
Assumption: More salvage is going overseas, impacting domestic parts availability and pricing.
It is widely accepted amongst salvage pools that more cars than ever are going overseas. Some border/coastal pools claim that 40% of their “rebuildable” salvage goes to international buyers. Dismantlers are being outbid by these buyers and believe that this will cause a recycled parts shortage, driving the total loss rates even higher. But why is this happening? One reason is web bidding. Before Internet bidding was available, an international buyer would have to fly or drive to the US to participate in an auction, requiring considerable time and expense on the part of international buyers in order to participate in bidding. The combination of local and Internet bidders helps drive record salvage recovery rates. Another reason for the increase in salvage recovery rates is favorable exchange rates. The US dollar has softened considerably since 2003 compared to other currencies. In fact, international buyers have seen a 32-44% increase in their buying power since 2003. For European buyers, salvage valued at $10,000 USD cost 9,708 Euros in 2003, but dropped to only 7,917 EUR Euros by October 2006. This overseas buyer has become so common that shippers provide reduced container pricing for a “four pack” of vehicles to a European base port, often as low as $925 per vehicle. In combination, ready access to domestic auction markets, increased purchasing power due to favorable exchange rates, and reduced shipping costs (also impacted by exchange rates) make the US an attractive market from which to acquire salvage.
Assumption: Shortages of available recycled parts are driving parts prices higher, further increasing total losses.
Status: CON TESTED
We analyzed thousands of estimates from 2003 through mid-2006 looking for a trend in pricing, recycled parts usage, or percentage of the estimate dollar. The average part price has actually decreased from a high of $132 in 2003 to $122 in 2006. As a percentage of estimate dollars, recycled parts have held flat at just over 11% during the same time period. Regardless of the measure utilized, the use and price of recycled parts has been flat for the past four years.
Assumption: The increasing number of total losses is driving lower salvage return rates.
Finally, we looked at how total loss rates would affect salvage returns. Some states with high total loss rates had high returns and others had the opposite. We couldn’t find any direct correlation, and neither could other industry experts with whom we consulted. While most would expect that a high number of total losses would drive down returns (too much supply) quite the opposite was often true. Vehicles that were arguably totaled out too early can become valuable as salvage, fetching top dollar when sold at auction.
So, what’s the bottom line on Salvage Returns vs. Parts Availability?
• For most carriers, the relatively flat “repairable” estimate has been at the cost of increasing total losses. As fewer and fewer “hard-hits” are repaired (and instead totaled) the overall repairable estimate figure can appear artificially low.
• When more vehicles get totaled due to front-end collisions, salvage pools end up with the task of remarketing a disproportionate number of front-end damaged salvage vehicles to buyers seeking undamaged front-end components.
• When an insurer works hard to lower their total loss rate by repairing more cars, they will inadvertently lower their salvage returns by turning only heavily damaged vehicles—which contain fewer salvageable components—over to the pools.
For the foreseeable future, we can expect that the number of total losses will continue to increase, due to the inclusion of additional (expensive) safety devices and electronics, and the reluctance of vehicle owners to accept the repair of a heavily damaged vehicle. US salvage buyers will have to compete with international buyers at least as long as the exchange rate stays in their favor. The usage and price of recycled parts will remain relatively flat until insurance companies perceive the benefit of recycled parts vs. other repair options.
By Keith McCrone, Senior Director, Product Management, Mitchell International from the Mitchell Industry Trends Report