Can insurers sell recycling?

On 1 June seven major insurers will embark on the tough task of convincing consumers to use recycled parts to repair accident-damaged vehicles.

If successful, there will be a revolutionary change in the way insurers, repairers and salvage companies operate.

Under the Recycled Parts Group (RPG) pilot, policyholders whose vehicles are over five years old or are so badly damaged that it would not be economically viable to repair them using new parts will be given the option of having used parts fitted.

Any used parts will be manufacturer-original and cosmetic only, with insurers promising not to use recycled mechanical or safety parts.

The motivation for insurers is obvious. For the pilot, members of the National Salvage Group (NSG), which has been heavily involved in the consultation process, have agreed to sell used parts for 30% of their new value.

The proposition becomes even more attractive if considering that, according to motor analysts Glass's Market Intelligence, the average price of new car parts has risen by 14% in the last year alone. As a Direct Line spokesperson says: "Manufacturers have got insurers over a barrel."

MMA's chief engineer Gary Brench claims that the reuse of parts is also an opportunity for insurers to prove their corporate social responsibility credentials.

The 2000 European End of Life Vehicles Directive sets strict targets on the recycling and reuse of vehicles. By January 2006, 85% of a vehicle must be reused or recovered and by 2015 the figure is 95%. Recycling parts, says the RPG, is essential if these targets are to be met.

So what's in it for the consumer? The insurers involved say there is no financial incentive for accepting used parts at this stage.

For the older vehicles, where using recycled parts may be the only economically viable way to save them from being written off, policyholders may well be happy to accept used parts in order to see their vehicle returned.

But what about claims for less serious accidents? Bearing in mind there is no obligation on the customer to agree, it is not an easy pitch: "Hello sir - would you like us to use new or used parts when we repair your vehicle?"

Reduction in premium
The RPG says that the widespread use of used parts will eventually allow insurers to reduce premiums or lower the excess on policies. One would reasonably expect take-up to rise as a consequence, but changing the mind-sets of consumers will not be easy.

According to Wolfgang Reinhardt, head of recycling at the European manufacturers' group ACIA: "There is no doubt that as a part is used, there is a reduction in quality." Insurers will need to reassure policyholders that this is not just a way for them to save cash. One of the easiest ways to do this is to pass the savings back to the customer.

Perhaps surprisingly, consumer groups have been largely supportive of the drive to increase the use of recycled parts. The involvement of motor safety information specialists Thatcham will help convince some that recycled parts will be of the highest quality.

Both the AA and the RAC have also lent their tacit support to the programme - with one proviso: that policyholders are explicitly consulted before any repairs are carried out using used parts.

But what is the obligation on insurers to do so? Motor policy wordings will frequently allow for the repair of vehicles using 'equivocal' parts. According to these indemnity requirements, if a five-year-old car is damaged it can be repaired using five-year-old parts. In other words, while the RPG insurers may promise to keep consumers up to speed, there is no legal obligation on them to do so.

The success of any wholesale change to the motor repair industry is likely to depend on the involvement of the key players. Yet both the Royal Bank of Scotland's stable of insurers (Direct Line and Churchill) and Norwich Union are notable by their absence. Both were asked to participate and both declined.

Direct Line told Insurance Times: "We do not feel it is viable from either a practical or service level perspective at this time. In our view, a great deal of work would need to be done to ensure that customers would find this a satisfactory approach."

Norwich Union was more circumspect:

"We are broadly in favour of the use of recycled parts, but feel it is too early to commit ourselves."

What is clear is that this experiment will be watched closely by insurers and consumer groups alike. There is a widespread consensus that the use of recycled parts is attractive to insurers on an economic and ethical level. For consumers, the promise of cheaper premiums or a reduced excess will also be a big pull.

But, as Mike Monaghan chief executive of the Motor Vehicle Repair Association says: "It's easy enough with a small group of repairers and insurers, but if the scheme is broadened issues like complaints procedures, supply chain and delivery will emerge. I applaud the RPG for trying, but this is fraught with difficulties." IT

The Recycled Parts Group pilo

Who is participating
Admiral, CIS, Fortis, Highway, MMA, Allianz Cornhill and Provident. Motor information provider Thatcham is also involved.

When
Starting on 1 June for a duration of six months. After three months all parties will meet to discuss their findings. If successful, the scheme will be rolled out nationally.

Where
Poole, Doncaster and Gloucester.

Will the parts be guaranteed
Yes, the repairers promise to match any guarantee on a manufacturer's new parts.

What parts will be used
Only cosmetic parts will be used for the pilot - no suspension or brake parts will be involved. The parts will originate from accident damaged insurance vehicles, premature end-of-life vehicles and directly from manufacturers.

Will the policyholder receive any discount? No. If the scheme is rolled out nationally, insurers will look at reducing premiums or lowering the excess on a policy.