“Total loss” policies improve supply of salvage parts

Recently, there has been a dip in the actual cash value (ACV) of vehicles, following a drop in the prices of used vehicles due to the economic decline. The higher prices of raw materials have hiked repair costs, resulting in more “total loss” claims and eventually, a greater number of salvaged parts. Conversely, the use of salvaged parts will lower the cost of repair, which will result in reduced total loss vehicles, benefiting the insurance companies.

New analysis from Frost & Sullivan finds that the market earned revenues of $3.2 billion in 2008.

“More insurance companies are advocating the use of salvage (recycled) parts, as they try to control collision repair costs, thereby driving unit shipment of salvage parts,” says Frost & Sullivan industry manager Avijit Ghosh. “If repair costs are not controlled, the insurance premiums will amplify.”

Further, salvage is a convenient way of getting rid of used vehicles. As the owners who donate their used cars get tax credits, there has been a rise in the availability of salvage parts and used-vehicle owners are increasingly turning to the salvage industry.

The lower market for retail-used vehicles and new vehicles has affected dealer demand for wholesale used vehicle inventory, reducing the prices of salvage parts. Moreover, the salvage industry participants have to stave off stiff competition from original equipment manufacturer (OEM) parts, especially in collision repair. This is because OEM parts are considered to have better fit, form, and function and provide enhanced safety, durability, and reliability.

Repair shops use a high percentage of OEM parts in crash repair because they get higher margins on them. They find it a riskless proposition to order OEM parts as the insurers pay a higher amount for them. This effectively eats into the sales of alternate parts (aftermarket and salvage parts).

“However, some insurance companies fully support and encourage repair shops’ usage of salvage parts for collision repair,” notes Ghosh. “The primary objective is to reduce the cost of repair practice and maximize the value of the salvage vehicles.”

Meanwhile, with more orders for late models, North American brands in developing countries have escalated the demand for salvage vehicles that are easily reconditioned to a reasonable state at an acceptable value, in order to maximize returns.