Salvage means business in many ways

The South African Insurance Association (SAIA) and the Banking Association of South Africa agreed on a Code of Salvage in 2006. But this document is being revisited to address current industry challenges. The SAIA is also exploring the possibility of implementing a salvage database to assist with salvage management.

The way in which the industry deals with vehicle salvage could assist in tackling vehicle crime as well as improve the dire road safety situation on our roads. Just consider the following potential scenarios:

A vehicle is stolen. The insurer pays the policyholder’s claim, either to the owner of the vehicle or the titleholder. Now the vehicle ‘belongs’ to the insurer. The vehicle needs to be de-registered, and the registration documentation obtained from the owner and/or titleholder. The vehicle must then be dealer stocked in the name of the insurer as titleholder. The change of ownership procedures must be followed when handing the vehicle over to the salvage agent and whit it is subsequently sold.

There are two categories of "write off” that might follow a vehicle accident. It the car is uneconomical to repair (usually when the damage to the vehicle exceeds 60% to 70 %) it must be sold on as a Code 2 vehicle (used). In the event of a write off because the vehicle is deemed permanently unfit for use (or permanently demolished) the vehicle is marked Code 4. Various procedures then need to be followed for de-registration, re-registration, dealer stocking and change of ownership in each of these scenarios.

The record of the vehicle can be obtained by criminals at any of these administrative stages. Stolen vehicles’ records are very valuable to criminals who often obtain them from the financial institutions (banks and insurers), from eNatis, from the licensing authorities, from the salvage agents, at the police stations where recovered vehicles get their police clearances, etc.

How does all the above contribute to vehicle crime? Criminals take advantage of a divided approach, lack of control and other opportunities. Vehicle crime is a market orientated crime. And it is about big business. The domestic market is the biggest money spinner for vehicle criminals, especially because it is possible to legitimize vehicles on our roads by registering them on the eNatis system.

Colonel Lieb Liebenberg of the South African Police Service provided the following case study:

A Volkswagen Golf GTI TSI was stolen. The following is included in the "overhead” of the criminal:

Purchase of the stolen vehicle:                                                          R 7 000

Obtaining the registration documents:                                                R 8 000

Tampering with the identifiers on the vehicle to match the record:       R 2 000

Commission to middleman for purchase of vehicle:                            R 2 000

Total investment:                                                                              R19 000

The trade value for this vehicle ranges between R219 298 and R240 900, leaving a total profit of around R200 298! Given this "costing” it is easy to see why vehicle crime is still a huge issue in South Africa. Around 30% of the costs of motor claims are linked to vehicle crime – and although this is not the biggest challenge to the ongoing sustainability of motor insurance – it presents a frightening picture.

The insurer pays the original claim of a vehicle that was stolen. Due to a lack of control over registration documents, or following incorrect vehicle coding or registration, de-registration and other processes, the insurer or its contracted parties in the salvage process, a vehicle record could end up in criminal hands. As a result another stolen vehicle can be ‘legitimately’ registered. This vehicle will be bought by someone, and ends up being insured by the insurance industry again!

Proper salvage management will contribute to the fight against vehicle crime and limit insurer exposure. The industry will no longer insure cloned vehicles – thereby addressing cost, risk and sustainability – and delivering more affordable insurance to the consumer. Improved systems will limit both the heartache for a policyholder and reputation risk to the insurer in the event it emerges the purchased and insured vehicle was actually a clone.

South Africa has a shocking road safety track record. In addition to the loss of lives and the cost of road accidents the fact remains that 70% of the cost of motor vehicle claims for insurers stems from accident damage.

Road accidents translate directly into accident-damaged vehicles, which directly contribute to the extent of the vehicle salvage managed by the insurance industry. A lesser known fact is that poorly managed salvage contributes directly to the carnage on our roads.

Consider the following scenario:

A vehicle is damaged and should be coded ‘permanently unfit for use’ (Code 3) or ‘permanently demolished’ (Code 4). Because the vehicle is worth more as a code 2 vehicle it is eventually sold on as such, and repaired by the new owner. Often, the repairs are not up to standard and an un-roadworthy vehicle is returned to the roads, where it contributes to a future accident.

The insurer received a higher amount when selling the salvage. However, the insurer has already paid the original claim and it – or another insurer – will end up insuring the repaired ‘used’ vehicle. Should this vehicle land up in an accident because of its un-roadworthy state the insurer will end up paying additional damages. A small saving on the salvage quickly escalates into a massive loss!

This scenario contributes to the argument that incorrect coding is both costly to the insurer and negatively impacts the sustainability of affordable comprehensive motor insurance in South Africa. It is also unethical and undesirable on many other levels.

In describing the above scenarios, and commenting on the duties of insurers in salvage management, I am not saying that insurers have full and final control over the situation. In reality insurers cannot address the situation fully on their own.

 

The following section outlines the roles and duties of the various stakeholders and will be addressed in a revised, more comprehensive, Code of Salvage.

The bank/finance house must ensure proper document control, follow correct registration processes, and liaise with insurers re various stages of the process.

The insurers play the most important role, even when outsourcing some of the functions related to salvage. In terms of the current SAIA Code of Conduct, insurers take full responsibility for all their actions, whether directly or indirectly through contractors. This remains extremely important in salvage management.

Insurers must code the vehicles in their possession correctly, exercise proper control over documents and keys, and follow the correct procedures regarding registration, de-registration, re-registration, police clearance, etc.

It is the insurer’s duty to obtain – and check – the details of the vehicle, its documents, and its owner at underwriting stage.

It is the insurer’s duty to train their relevant staff, as well as their contractors, so that they can exercise their duties. Especially the training of motor assessors is of vital importance.

It is the insurer’s duty to communicate along the complete chain and to ensure that the correct procedures are followed.

It is the duty of brokers and underwriters to follow the correct procedures, as per the Code of Salvage and instructions of the insurers, including all the above mentioned functions of the insurers, if so contracted.

Salvage agents should follow the Code of Salvage, as well as instructions by the insurers as per their contracts which should include all aspects mentioned under the insurer’s role above. Salvage agents also have a role to play in advising insurers in the coding of vehicles, as per their expertise, if they deem appropriate.

Many challenges exist that are out of the hands of the insurers.

 

The vehicle registration process presents many opportunities for criminals. There are thousands of stolen face value documents in circulation in South Africa at present – and criminals have access to corrupt officials working in the eNatis environment. Licensing authorities and police officers involved in the clearance processes are not beyond reproach either. The authorities therefore have a huge role to play in reducing opportunities and addressing vehicle crime.

It is possible that an on-line registration and de-registration function would address many of the current flaws. This will reduce the availability of documentation and limit the number of people involved in the process, thus eliminating many system weaknesses.

Salvage management is important because the insurance industry and banking industry have unintentionally become second hand goods dealers. In terms of the Second Hand Goods Act of 2009, a ‘dealer’ is a person who carries on a business of dealing in second hand goods, including acquiring and disposing of goods. In view of this definition, motor vehicle salvage is included in the ambit of this Act. And in terms of this Act, insurers and banks will have to register as dealers in terms of the Act! Associations (including the SAIA) will have to register as dealer associations too.

The Second Hand Goods Act is intended to address the market for stolen goods, and to promote ethical trade. When one relates these intentions back to the scenarios described above it is easy to see that the objectives of appropriate salvage management are the same as that of the Act.

If the industry gets salvage management right we should qualify for an exemption from the Act. This is another reason why the current drafting of the new Code of Salvage which will address the opportunities and challenges explored above is so important. A Code is as good as its implementation and a concerted effort is required by all the role players to make sure that we are successful in this regard.