Subrogation Outsourcing Offers Value, Greater Claims Recovery

How an insurance company handles the subrogation function impacts its value to policyholders and shareholders. While financial stability, underwriting expertise and breadth of coverage remain important, an insurer’s claims service provides a clear opportunity to distinguish itself in the marketplace.

One opportunity for insurers to improve their claims services is through business process outsourcing, typically referred to as BPO. Business process outsourcing transfers to a third party the responsibility of operating what would otherwise be an internal system or service. Subrogation BPO is a relatively new development and agents and brokers should be aware of its prospective impact.

Ward Financial Services, which has long provided benchmarking information for hundreds of insurers, annually publishes data that distinguishes average insurance companies from high performers. Companies that achieve superior operating results subrogate claims at about twice the rate of average companies.

Sports minded observers often see the “claims game” as almost exclusively “defense.” Legions of staff adjusters are employed by insurers to resolve claims. Adjusters, in turn, employ outside investigating and adjusting firms on an episodic basis to handle particular losses or overflow. Third party administrators may also be employed for claims handling on a more long-term basis.

Claims service vs. subrogation
The one part of the “claims game” that is “offense” is subrogation recovery. This is the insurer’s opportunity to go after the party responsible for the event that caused it to make a loss payment and get all or part of its money back. When the subrogation recovery process is completed promptly, transparently and successfully, policyholders who paid their deductible realize an added value from the insurer with whom their agent or broker placed coverage.

Historically insurers have been poor at playing “offense.” In part, this is due to their staffing and resource allocation decisions. Within recent years, insurers have downsized and otherwise changed the character of their claims organizations. As a consequence, the average experience level of staff adjusters has declined and average workloads have increased while the claims department receives little in the way of technology or other help in a climate of scarce resources and tight budgets.

A recent Deloitte survey of senior insurance company executives conducted during the second half of 2003 found that enhanced claims management processes is a key area of focus for improved performance. Only 15 percent describe their claims management process as excellent, fewer than half believe their processes are good and the rest say they are fair. An earlier study by Accenture based on an analysis of 7,000 settled claims and interviews with more than 3,000 claims personnel observed that claim settlement costs can be reduced significantly through a combination of new technology, workflow/process improvement and workforce training. Although subrogation was not the focus of the Accenture study, the report contains some interesting data that relate to that subject. The study found a 15 percent lost economic opportunity as a consequence of failure to recognize recovery potential and failure to aggressively pursue recovery. In summarizing the distribution of total working time of claims handlers, it found that approximately 3 percent of their working time was devoted to recovery efforts.

Staff adjusters handling hundreds of first party and third party claims are often measured by how many files they have closed, the time it takes to close a file, etc. Amid a constant flow of new claims every day, there is great pressure to close files and move on to the next claim as quickly as possible. In theory if the circumstances of a loss suggest that damages the insurer paid were wholly or partially the fault of another party, the adjuster should then open a subrogation file to pursue recovery from the responsible party. However, the adjuster may have little incentive to do so when performance reviews are heavily weighted toward the “defense” game. Moreover, the pursuit of subrogation requires a different, more creative and aggressive mindset than that typically found in many playing “defense.”

Old subrogation models
The prevalent practice is to send closed files to outside law firms to review for subrogation. Such law firms receive a large amount of claims that hold little or no recovery prospect and a smaller number of claims that do. They are typically compensated on a contingency basis whereby the insurer pays the costs of presenting and/or litigating the claim and the law firm receives one third or more of any recovered sums. It is in the law firm’s economic interest to be highly selective and pursue only cases with the largest recovery potential.

At the opposite end of the spectrum are firms that are organized as collection agencies. Typically, they have a high volume of consumer debt collection and similar transactions. While they purport to handle subrogation recoveries as well, there are fundamental differences. Subrogation recoveries turn upon factual and legal issues not present in collection work, and the staff of such companies infrequently has the appropriate understanding of insurance or liability issues. Consequently, they are not likely to be particularly successful in achieving recoveries and those they do obtain are heavily discounted to a fraction of the sum that could otherwise be recovered.

Either or both practices under-perform. While insurers do get something from such arrangements it is far less than they could achieve by other means. When, to mix metaphors, the “pie” is measured in billions of dollars even a one-point difference has a material financial impact.

Subrogation BPO
As the industry’s capital position has been stretched by higher losses, lower investment income and the need by many companies to boost reserves, there is increasing pressure to use capital more wisely. It is not surprising to find that businesses are increasingly attracted to strategic outsourcing. Successful subrogation BPO organizations present specialized expertise, economies of scale, lower costs and higher quality as compared to inside resources and are valued because they are more efficient and effective.

Increased recoveries mean that an insurer’s loss experience (personal and commercial auto, homeowners, large commercial fire losses, etc.) is improved. For example, two insurers writing substantially the same volume and lines of business, each of whom incurs aggregate losses of $1 billion, become differentiated when insurer A recovers 2 percent of its losses and insurer B recovers 10 percent of its losses.

Improved loss experience means that the insurer may elect to charge a somewhat lower premium. Coincidentally policyholder satisfaction also increases when they experience the recovery of their deductible. Lower premiums mean that insurers can increase market share. Lower costs, greater recoveries and increased market share mean higher profits and greater shareholder value. Equally important, the improved claims management processes mean greater policyholder value.

David B. Zoffer is an attorney, mediator and adviser on legal cost control and claims best practices. The Zoffer Firm provides expertise in litigation management, claims operations cosulting and BPO guidance for the P/C industry. He can be reached at (919) 932-2230
or by e-mail: DBZoffer@mindspring.com.

Topics Carriers Agencies Profit Loss Claims