Don't Let Millions of Subrogation Dollars Go Down the Drain
How management and technology can turn subrogation from a money pit into a bonanza
By Brian Cohen
The subrogation process is often the weakest link and the most time-consuming step in the lifecycle of a claim. Nearly every carrier will admit that it could do a better job with subrogation. However, a successful subrogation outcome is critical to the policyholder's satisfaction because it is the final step in making the customer whole again. Many insurance companies frustrate policyholders when ineffective manual subrogation processes take months to recover their deductible. Lack of proper management control and automation results in inconsistent processes and missed opportunities, insurers often recover less than they're legally entitled to. This can result in millions of recoveries down the drain. Throw in the ever-increasing use of vendors like lawyers and collection agencies and you have an out-of-control money pit.
But all these weaknesses can be overcome by applying basic management controls and the right technology to provide structure to the subrogation process. This can be a huge opportunity to improve bottom-line financial results and boost customer service.
Why It's a Problem
Historically, subrogation has been a stepchild of the insurance industry, largely seen as something that insurers do as an accommodation to policyholders, but grudgingly. It has suffered from both management neglect and lack of automation.
But there's big money in subrogation. Subrogation assets vary by line of business. An insurer with $1 billion in claims reserves may have $100 million to $150 million in subrogation receivables outstanding (though few companies have any way to track it). While some of this money is owed to insureds, good chunk will flow straight to the company's bottom line. The faster and more efficiently it can be collected, the better it is for both customers and the insurer.
Traditionally, subrogation has been handled by claims adjusters as an afterthought. It's a low priority for adjusters, who are often compensated by how fast and effectively they handle new claims. They're more motivated to settle the next claim than wrap up subrogation on an old one and thus see subrogation as a distraction from their primary responsibilities.
Furthermore, almost diametrically opposed skill sets are required in adjusting a claim and pursuing subrogation. A good claims adjuster is client-focused, working hard to wrap up the claim investigation to ensure that the customer will have a good experience when it finally comes for the insurer to fulfill its promise.
Subrogation is a longer process and more hardnosed. Subrogation specialists must argue theory of liability with the responsible party, make a compelling demand for payment and negotiate settlements. And they often have to get "blood out of a stone" when the guilty party in an auto accident is uninsured and not exactly flush. It takes patience and persistence.
In this unstructured environment, claims adjusters tend to settle faster and for smaller dollars than they should. If the case becomes complex, they often automatically send it to a law firm or collection agency that takes up to a 33% cut of the net recovery amount. Lawyers often sit on the settlement, further delaying reimbursement to both the insurer and its customers, who are left wondering for up to a year when their deductible will be reimbursed.
Doing It Right
The first step in getting control over subrogation is putting the right people on the job by creating a separate subrogation function-industry- leading insurers have done this. They've staffed the subrogation department with capable people who have the right skills. And they've created a profit center mindset, treating subrogation as a receivable or any other valuable company asset that is carefully monitored and managed. And they're getting results.
But this is only part of the solution. Subrogation specialists need technology that provides automated support. Without an automated tool to help negotiate, track payments and monitor performance of the recovery effort, both subrogation specialists and managers are severely handicapped.
Automation Enables Subrogation Excellence
Get rid of clerical busywork. Subrogation is the last bastion of manual processes in the industry. Insurers have spent fortunes updating their policy administration and claims systems and creating powerful, user-friendly Web sites. But subrogation has been left alone-and the results, predictably, have been poor.
Less than 30% of insurers use software to identify and manage subrogation files, according to the National Association of Subrogation Professionals 2005 automobile benchmarking study. Thus, subrogation specialists spend a great deal of time on clerical work: sorting, gathering, photocopying and prioritizing files, manually preparing and mailing demand-package documents. But the vast bulk of clerical work can be turned over to a computer system, thus freeing the specialists to do their real work by using their judgment and negotiating skills.
Assigning new subrogation files to the best adjuster is another time-consuming job that should be automated. Without automation, the manager has to examine all new files, determine who's working on what and assign the file to the subrogation specialist most capable of handling it or who has the lightest caseload. But the right subrogation system should be able to assign cases automatically, based on a score or other file criteria such as line of business, dollar size or geographic territory.
A good subrogation system and process should track the workload of each subrogation handler and spread the workload evenly. Most of the time, the assignment process should be hands off with no one needing to touch a file.
Separate the Wheat from the Chaff
Only some claims merit an extensive subrogation effort and offer a good chance of recovery. How can an insurer reliably separate out the most likely winners from the almost certain losers without wasting resources on low-return files?
Using sophisticated algorithms and the right technologies, an insurer can separate the wheat from the chaff by identifying claims that have high probability of recovery. Each claim can be assigned a score. Those with scores above a certain threshold can be automatically assigned to a subrogation staffer; those beneath the threshold may be outsourced to better match recovery costs with expected return. Different workflows can handle high-probability and low-probability claims.
With today's advanced subrogation systems, identification and scoring can integrate with daily workflow to determine whom the case should be assigned to and the most cost effective next steps to pursue recovery. These same algorithms and systems can be used from time to time to review closed files and unearth additional subrogation opportunities that should be pursued.
Develop and Enforce Best Practices
Insurers can't rely on good luck or even experienced subrogation specialists to ensure that every claim is handled properly or consistently. After all, not every staff member is experienced or has the same skill level. A subrogation system should provide ample tracking and management tools so that managers can measure results and determine what works and what doesn't and proactively identify best practice activities.
Once these best practices are nailed down, the system should replicate the skills, knowledge and shortcuts of the most effective subrogation specialists. By ensuring that everyone takes the same steps and follows best practices throughout the recovery process, technology should enforce best practices to ensure subrogation claims are handled consistently from person to person and office to office.
Get the Most Out of Vendors
Vendor selection and oversight is the weakest link in the subrogation process. This situation is ironic given the propensity of insurers to track every penny of premiums, investments and claim payments. Few companies have any real idea how many subrogation files are outstanding with vendors, when they will be recovered or what they're worth. Most cannot tell how many vendors they use or exactly who is handling a specific subrogation file. There is seldom enough data to decipher which attorneys are holding judgments and how big those judgments are. This lack of control over company assets would not be acceptable to most CFOs and chief claim officers; however, many senior claims executives are not fully aware of this exposure. This lack of control can result in more than missed recoveries to carriers. It could lead to carrier liability, regulatory attention or a lawsuit if the vendor is sloppy or negligent.
The problem starts with no formalized vendor selection process and informal relationships with attorneys, collection agencies, cause-and-origin experts and investigative experts. For many carriers, vendor selection and assignments are made by the adjuster. The chief claims officer may not even be aware of who is being used or the qualifications of the vendors. There may not be a contract or service level expectations documented in the agreements. Even within the same office, you'll often find the same vendor charging different specialists different fees or providing inconsistent services on similar files. There is little in the way of reports to monitor vendor performance or even the number of files that are being worked by a given vendor. Subrogation files placed with vendors are invisible to claims management and as a consequence cannot be proactively managed. It's an uncontrolled process.
Once again, technology offers a solution. Well-designed vendor relationship tools can control the entire process in one place. By automatically assigning files to properly qualified and approved vendors and maintaining a scorecard of vendor performance, managers then have the information and tools to hold underperformers' feet to the fire. Once an automated tracking system is in place, the technology should also quantify where all the files are and their dollar value. The subrogation manager can then get a clear picture at both the macro and case level.
Getting control over subrogation starts with making it a priority and assembling a dedicated team of specialists with the right skills. Next, the team must have automated tools to help negotiate settlements, track payments, monitor performance, enforce best practices, manage vendors and make assignments. The final ingredient is a sophisticated reporting tool so managers can track every penny of subrogation assets and demonstrate to senior executives how much more money has been recovered expeditiously. Instead of a money pit, subrogation can be a money bonanza for carriers and their customers.
Brian S. Cohen is president of Clear Technology, a software company in Denver, Colorado, that serves the insurance industry. He can be reached at firstname.lastname@example.org