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Super charging the demolition derby's spoils

Oct 01, 2017 | 07:00 AM | Fastmarkets AMM staff

On a fast track, live and on-line salvage vehicle auction company IAA is racing to keep pace with the rise in the ‘total-loss’ frequency rate of wrecked autos and exploring forming strategic relationships with auto recyclers and dismantlers.

Insurance Auto Auctions (IAA), a leading live and ‘live’ on-line salvage vehicle auction company, is responsible for the recycling of more than two-million tons of steel and 275,000-tons of aluminum annually from the damaged vehicles it sells. And that number is rising as the company rapidly expands both the number and size of the auction sites it operates.

At the same time, IAA has recently begun exploring forming strategic relationships with a number of the automotive dismantlers and scrap metal recyclers/processors that comprise an essential part of the customer base for the damaged and donated vehicles the company auctions.

Founded in 1982, Westchester, Ill.,-based IAA is a business unit of KAR Auction Services Inc., Carmel, Ind., a Fortune 1000 company serving  global, wholesale, used-vehicle industry buyers and sellers with a variety of innovative, technology-driven remarketing solutions. 

IAA’s growing network currently counts 175 sites in the United States and Canada, from which it now sells more than two-million cars and light trucks annually through weekly auctions at each of those locations.

“The marketplace we service is truly worldwide,” John Kett, IAA’s president and chief executive officer, says. Kett goes on to note that while the company runs traditional, open-cry auctions with an auctioneer at each of its sites, the events are also “attended” by on-line bidders from some 110 countries around the world, who simultaneously compete with live bidders.

The lion’s share of the vehicles IAA auctions have been damaged in auto accidents and deemed a total loss by insurance companies. While the bulk of the offerings are, indeed, end-of-life vehicles being sold by insurance companies, IAA also auctions damaged vehicles for fleet rental companies and auto dealers.

Such goods may be somewhat damaged, but not fully totaled, Kett points out. For instance, the offering may be an older, rental-fleet vehicle that was involved in an accident shortly before the rental company planned to sell it.

Rental companies tend to turnover their fleets every few years, Kett shares some background. Or they may opt to trade-in a vehicle that would otherwise require a dealer to invest too much in repairs to sell it themselves.

In either case, the car rental agencies sometimes decide to sell vehicles though a wholesale, used-vehicle auction, such as that run by IAA’s sister company, Adesa Inc., through the former’s salvage marketplace. Another sister company, Automotive Finance Corp. (AFC), provides inventory financing and other business services, primarily to independent, used-vehicle dealers.

In addition, a donation division established by IAA in 1994 acts as a liquidation arm for charitable organizations by providing an outlet for the charities to turn donated vehicles into cash. Kett describes the unit as “a very small part of its business and likely to remain so.” 

IAA’s primary focus, he says, is to service insurance companies looking to sell vehicles they consider a total loss. Providing that service involves activities ranging from picking up and transporting the vehicle(s) into one of the company’s yards, where they are inventoried and photographed, to securing the appropriate titles for the vehicles.

The company also offers various other solutions keyed to free insurance companies from time-consuming back-office operations to concentrate instead on enhancing customer service. Included among them are IAA’s recently launched Total Loss Solutions suite of products designed to help insurance companies better manage total-loss claims costs, including those related to title and inspection services.  

Kett estimates that some 30-percent of the vehicles it auctions are exported outside of the United States and Canada, with Mexico counting “by far” as the largest export destination.

“We don’t know what percent of the vehicles we sell are recycled,” he says. “We just sell vehicles via our auctions. What the buyer does with those vehicles is strictly up to them.”

At the same time, IAA is keenly aware that many of the vehicles it auctions are being purchased for the value of the parts and/or the ferrous and nonferrous scrap and precious metals they contain. Realizing that the value of such metals and auto parts play a pivotal role in determining what buyers are willing to pay for the damaged vehicles, IAA has been increasingly compiling and offering both buyers and sellers market-related intelligence.

The information – tracked by KAR’s data science team – ranges from scrap metal market trends to currency movements. Included are various data points tracing factors that could directly influence the salvage market including the U.S. Dollar Index (USDX), the Used Car Price Index, the producer price index of motor vehicle parts, the Crushed Car Price Index and the Foreign Buyer Index.

“We used to just let the auction bring whatever it would bring,” Kett recalls. That relatively hands-off approach has given way recently, however, to IAA’’s efforts to better inform the buyers and sellers comprising its customer base with market intelligence. To that end, the company has opted to invest in researching, analyzing, and providing select data to help educate auction participants about the dynamics of key market drivers.

During the second quarter of this year, IAA recorded a 12-percent rise in year-on-year growth in North American sales volumes. Very positive market fundamentals – including a 27-percent increase in scrap pricing and a significant increase in the percent of automobile claims resulting in a total loss – have contributed to the gain.

The total-loss frequency rate moved up to 17.1 percent from about 15 percent just a few years ago, Kett notes. Given the rise in both labor and auto repair costs, more vehicles have been and are being steered to IAA’s marketplace.

Natural catastrophes count as another factor fueling damaged-vehicle growth. Estimates indicate, for example, that Hurricane Harvey alone has resulted in the loss of as many as one-million vehicles due to flooding caused by  the storm.

Kett notes that although 2016 didn’t experience storms anywhere near the scale or ferocity of Harvey or Irma, last year counts as one of the most active weather years on record. And in addition to the hurricanes that ripped through Texas and Florida only weeks ago, several very strong hail storms resulted in insignificant vehicle damage this year, he adds. 

To keep pace with the increasing availability of damaged vehicles, IAA is on an aggressive growth track. The company currently operates physical auction sites in the top 75 North American metropolitan statistical areas (MSAs), including locations in 49 U.S. states.

Plans to move into the 50th state – Wyoming  – are underway and IAA has been adding second or third locations in certain MSAs and/or expanding existing sites to accommodate the current and expected future growth of damaged vehicles based on the predictions of both KAR and IAA’s strategic partners in the insurance sector.

Only weeks ago, IAA announced in mid-August that it was adding more than 550-acres of land to provide more storage space at 28 facilities located across 15 states – Alabama, California, Florida, Georgia, Indiana, Kansas, Louisiana, Minnesota, Mississippi, New Jersey, New York, South Carolina, Texas, Utah and Virginia.

The force driving the move is twofold, Kett explains. One is to better position and equip IAA to respond to catastrophes along the Gulf Coast and the Eastern Seaboard. The other is to better serve and expand IAA’s buyer base by providing greater choice and convenience. 

The latest investments top-off a track record showing considerable growth over the past few years in the form of adding new locations and expanding existing sites. The company previously announced plans to open a 16th facility in Texas – in Fort Worth – in November on the heels of announcing a third Oregon location, in Portland West, this June.

Earlier this year, IAA announced it was expanding the capacity of its Savannah and Tifton, Ga., facilities. The company added several new locations – including sites in New York and in Edmonton, Alberta – last year as well, in addition to expanding three Texas locations and one of its Virginia properties.

In concert with its sister KAR companies, IAA sees further avenues for growth as it continues to provide customers with new products and services. Besides looking to strengthen the strategic relationship with its insurance sector partners, IAA is also focusing on expanding international interest in its salvage auction marketplace.

At the same time, the company is making moves toward forming strategic partnerships with some of its scrap metal and auto recycler bidders.

“Up to this point, we were hesitant to do so,” Kett acknowledges, mainly because IAA has sought to remain “agnostic” regarding the outcome of its auctions. “We didn’t want other bidders to believe that we were giving one of their competitors a price advantage,” he explains.

The arrival of new data analytics and other technologies enabling IAA, in some cases, to predict the value of a damaged vehicle before it is put up for auction, have led the company to see things differently.

“We are looking to identify certain vehicles that could be sold directly to certain scrap processors or auto dismantlers that we could establish a relationship with,” Kett explains. Such an approach would allow partners to pay to have the damaged vehicle(s) shipped directly to their facilities, rather than having to attend an auction or bid online. “It could make it more efficient for everyone involved,” he adds.

While still early in the process, Kett reports that IAA is engaged in discussions with the Automotive Recyclers Association (ARA) and a number of larger automotive dismantlers and scrap processors to help determine if establishing a strategic relationship would lead to a more efficient approach to obtaining the end-of-life vehicles such customers are looking to buy.


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