Present System of Salvage Handling and its Shortcomings

An overview of present salvage handling system being followed by Insurers in Indian General Insurance Industry

1. Occurrence of Loss;

2. Adjuster appointed and she visits the site of loss where she apart from doing various activities related to loss verification and loss assessment, also handles salvage by salvage identification,
   segregation, inventorize the goods and so on.

3. Adjuster requests the Insured to retain the salvage till further instruction and protect the salvage.

4. Salvage Assessed by the Adjusters based on their experience and, if required, quotations called from open market by the Adjuster and/or Insurers.

5. Salvage is assessed based on the highest quotation so received. Tenders called and newspaper advertisement published in case of large salvages.

6. In case insured offers more, Generally they are allowed to retain the salvage, else disposed to the proposed buyer under Adjuster’s supervision.

Shortcomings noted in the above salvage handling system, which may be divided into three categories:

I. Shortcomings relating to Management of Salvage

II. Shortcomings relating to Valuation of Salvage

III. Shortcomings relating to Methodology of Salvage
      Settlement/Disposal.

I. Shortcomings relating to Management of Salvage:

Following five shortcomings may be noted in the present system of managing salvage:

a. Insensitivity of Insured towards salvage: The salvage remains in the custody of the Insured and the responsibility to manage and maintain it remains with the Insured who Generally tend to be insensitive towards the salvage. When a proposed buyer inspects the salvage it is not at all in presentable state and there itself the expected value of salvage goes down. Almost all the insurance policies now-a-days are on RIV basis. In such circumstances, Insured has got a tendency to expect new for old and in the process tend to ignore salvage. Proper management of salvage is Generally not a priority for the Insured.

b. Possible Misappropriation of Salvage: Over a period of time, before the claim gets settled, Insured sometimes tend to utilize or sell the unaffected or less affected items out of the salvaged merchandise. In such case, if later on Insured retains the salvage, Insurers end up paying full value to the Insured in respect of such utilized items and get a nominal amount reduced from the claim amount as salvage offer from Insured. There is no system of re inventory of salvage where Insured retains the same.

c. As an Adjuster, it is not feasible to keep day-to-day supervision of the salvage vis-à-vis inventory prepared by them.

d. Delayed salvage settlement: Where the claim settlement takes long, the salvage value normally deflates over a period of time. Now, since salvage is normally disposed at last stages after loss ascertainment / settlement, the quotes are considerably lower than its potential value at the time of loss. It may be pointed here that loss is indemnified as on date of loss but salvage value is considered at a point of time much later than that in such cases.

Even if in some cases the salvage value inflates as compared to the date of loss, the Insured may not agree to the same. In some cases, the value of salvage inflated so much that the actual value of loss as per rates as on date of loss appeared negligible. Insurers, in such cases, have to face a lot of hurdles in convincing the Insured, if at all.

e. Deterioration in salvage value, if any, normally remains unaccounted.

II. Shortcomings relating to Valuation / Optimization of Salvage realization:

Presently the onus of handling the salvage and disposing it lies with the surveyors and loss adjusters. To comment on the present system of salvage handling by loss adjusters relating to valuation would become a lot easier with the help of following imaginary story:

One day, a Paper consignment and a Rubber consignment (both a recent subject matter of their respective insurance claims) met at a marketplace and had the following friendly conversation:

The above imaginary story, though light heartedly, points out a very crucial shortcoming of salvage handling system in Indian General Insurance Industry that is the lack of potential market creation by Loss Adjusters and Insurers for disposing the salvage, due to various limitations.

In our Indian General Insurance Industry, underwriters and adjusters manage the salvage process, relying on a local market and the two or three bidders in their area. There has been a limited opportunity to build a broader market and limited expertise in the material involved. However, given the size of the potential salvage market, a concentrated effort to tap the same can create a tremendous opportunity. The use of Internet-based salvage marketing technology can be one of the ways to achieve that.

If the salvage is churned by its proper marketing, research and advertisement through various channels like internet, word of mouth marketing, and newspaper etc., loss can be mitigated by having got realized the Optimum Realization Value of the salvage. In most of the traditional salvage disposal efforts, available proposed buyers usually are limited to two or three. Using the online and other marketing techniques we can attract a dramatic increase in competition on an international level and the resulting proceeds.

Today, so much time is being invested by Insurers and Adjusters in word of mouth negotiations with no satisfaction of optimizing salvage realization at the end of day. This is just like when one purchases something from a shop that allows bargaining, she is never satisfied with the bargain unlike in case of a fixed price shop. We need to determine the price through law of economics and not through word of mouth. Let the market competition and law of economics decide the price, otherwise we would never know whether we have negotiated the maximum value or not, irrespective of the extent to which we have perspired for that.

Time that Insurers and Adjusters invest in negotiations may be utilized in developing innovative methods of cost avoidance and improving operations.

Following five shortcomings may specifically be noted in the present system of salvage valuation / optimization:

a. Insurers and the Adjusters rely on a limited market, limited experience relating to the salvage merchandise in question, and a few proposed buyers showing interest in the salvaged merchandise resulting in total lack of competition.

b. Not much education or interest is created for the buyer to generate real interest. Most of the times, Adjusters send proposed buyers to inspect salvage without properly informing them about nature and extent of damages. Sometimes, the visit itself is unplanned and unsolicited. Information provided beforehand to the proposed buyers in the form of photographs, online catalogue, nature and extent of damages with quantitative and qualitative inventory, can help buyers take informed and quick decision. A salvage manager or her representative, should, as far as possible, accompany proposed buyer during inspection so as to provide proper guidance relating to salvage identification, nature of damages etc. and coordination with the owner of goods.

c. Adjusters find limited time and have limited facilities to concentrate on salvage management. They normally do not market and advertise the salvage, tap the potential market, and hence do not optimize salvage realization. Also, as an Adjuster they are expected to only opine about the probable assessment of salvage and not actually optimize the salvage realization. Another drawback is the lack of reporting capabilities as regards salvage in majority of cases, which often leaves the analysis of salvage to anecdotal verification instead of thorough and quantifiable facts.

d. Insured are the best buyers of the salvaged merchandise, always. But, it needs competition and marketing to get their hidden margin out.

e. Insured mostly either reject the salvaged material or quote very less, primarily because of two reasons:

-Mostly the insurance policies are on NRV basis and since, Insured get new for old; they Generally do not show much concern about minimizing the loss by offering reasonable salvage value.

-Since the salvage remains their property and lies in their custody, they wait for the Adjuster to get a better quote and then accordingly increase their quotation using the Adjuster’s quote.

III. Shortcomings relating to Salvage Settlement / Disposal:

The methodology being adopted by Insurers for settlement / disposal of salvage needs alteration. It is to be understood that when a claim arises, the property in salvage remains with the Insured until the claim is paid. But since Insurers are the ones who are concerned with the recovery out of salvage, they themselves or through Adjusters go on to offer the said salvage to open markets without subrogation of rights in their favor.

To cater to this problem, a salvage manager is advised to act only on the behalf of Insured, Insurers being facilitators of salvage sale. An agreement needs to be entered between the Insured and salvage manager agreeing to all the terms and conditions of salvage sale. This way, since the Insured also gets involved in salvage sale, there is minimal resistance as regards salvage settlement and disposal.

Conclusion:

There is an urgent need to understand the various shortcomings in our present system of handling salvage. We need to scrap the old methodology and consider the need of the hour and adopt salvage management religiously.

Salvage Management is a full time job. It cannot be a small part of so many things that a loss adjuster is supposed to do. If at all we expect an adjuster to spend so much time on salvage handling, then the loss assessment activity itself may get hampered and we would lose in that respect. Perhaps that is why an adjuster as per rule and custom, is expected to just opine on the probable salvage realization based on his General market inquiries and not actually perspire to get some good results in that respect.

Salvage management needs to be made a regular part of the claims activity. Just like we appoint an adjuster after a loss takes place, similarly we need to call for salvage management immediately. We should not rely on adjusters anymore for our salvage handling or disposal needs, just like we would not rely on a dentist to cure head ache!

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