Using generic parts to cut costs

By Jonathan Faurie – FA News – 31 August 2015

Cutting costs in the short-term industry has been one of the foremost concerns on the minds of insurers over the past few years. While this may be a case of facing an unavoidable problem, there is a possible solution that is being overlooked.

A significant portion of the short-term industry is made up of motor insurance, and the accident claims that occur in this industry are high. While the industry is battling to move back towards being a repair industry as opposed to a replacement industry, perhaps the use of generic parts for non-safety critical sections of vehicles needs to be given careful consideration.

Delicate dynamics

According to Zakes Sondiyazi, Head of Motor at the South African Insurance Association (SAIA), out of the estimated 11 million cars on South Africa’s roads, only 35% are insured. Of the 35% that are insured, 40% to 50% are within warranty, a period during which the company repairing the vehicle is instructed by the vehicles manufacturer to use original parts.

“This is heavily controlled by the vehicle manufacturers and the use of generic parts during this period is basically unheard of. But there are also out of warranty vehicles that we can target. We are in discussions with the National Association of Automobile Manufacturers of South Africa to discuss the possible use of certified alternative parts on non-safety critical areas of a vehicle that is both within and out of warranty,” says Sondiyazi.

However, SAIA is first discussing various issues around the cost of original parts with a view to identify ways in which to address these costs.

Client insistence

Once the vehicle moves out of the warranty period, clients then insist on the use of original parts as opposed to generic parts. Sondiyazi reports that this is being driven by the fact that there is a general lack of knowledge and understanding amongst the public regarding generic parts.

“Generic parts do not mean they are of inferior quality. Insurers have an undertaking that they will never compromise the quality and safety of a vehicle in order to cut costs. Generic parts go through rigorous tests and are tested and approved according to high quality and safety standards. It’s just a case of using a part with a brand name as opposed to a part without a brand name,” says Sondiyazi.

The issue here is that because the client pays a premium, they feel that they are entitled to be put into the same position before the loss occurred; which is their right. But if the quality of the generic part is the same as an original part, but cheaper, the saving should eventually be filtered down to the client in the form of a premium reduction. This is a key message that needs to be explained to clients.

Industry benefits

There are a number of benefits that can be gained by the use of generic parts over original parts in the industry.

It will also go a long way in promoting job creation in South Africa. “South Africa is a net importer of motor vehicle parts as there are limited facilities available to produce parts in South Africa. However, if there is support from government, an alliance could be formed among insurers to back the formation and actively support the sustainability of companies who locally manufacture generic parts,” says Sondiyazi.

Insurers will also be able to reduce the cost of replacing written off vehicles. If we are not taking safety into account, the basic principle behind writing off a vehicle is that an insurer writes off the vehicle because it is uneconomical for the insurer to repair the vehicle. Sondiyazi points out that some insurers have even set the write off level as low as 40%. The use of generic parts on certain sections of vehicles will bring the costs of repairs down, which will result in fewer cars being written off.

Posted in General News

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