Insurance executives are familiar with subrogation, the insurer’s legal right to pursue damages after paying a claim. However, after a claim is paid, insurance companies often neglect to pursue their subrogation right, or do so with faulty subrogation practices. This means insurers often do not collect on subrogation opportunities, or spend so much money in the collection effort that the end result does not have a significant positive impact on their bottom line.
Up to 15% of insurance claims result in missed opportunities for subrogation, according to the National Association of Subrogation Professionals (NASP). In addition, up to 32% of recoverable claims are not pursued for collection, or the files are closed with zero dollars recovered. But paid claims that have subrogation rights transferred to them should be viewed as assets. Simply put, when insurance companies miss opportunities for subrogation, they lose money.
For companies willing to optimize their subrogation processes, the payoff can be large. For instance, $35 billion is paid out each year in damages for automobile collision repair—and improving just 1% in subrogation recoveries represents a significant bottom-line advantage.
By building a best-in-class operating model, insurance companies can become leaders in driving better business outcomes.
Increasing subrogation recoveries represents a great area of opportunity for insurance carriers to contain their loss ratio, improve customer satisfaction, and remain competitive in the market. While the subrogation function has always been a strategic focus for c-level insurance executives, most continue to facechallenges of prioritizing subrogation-related initiatives, managing ROI, and lowering the cost to collect.
Experience dictates that when the subrogation function is handled well, it can have a positive impact of up to almost 4% of an insurance company’s operating ratio.
In addition, up to 22% of paid claims can be recovered through subrogation recovery. The function’s clear impact on bottom-line results means that insurance carriers or claims organizations must optimize subrogation efforts in order to build a competitive advantage.
Why many opportunities are missed
There are a number of reasons why insurance companies often miss their chances to recoup losses after paying claims. Three common reasons for subrogation opportunities to be overlooked are:
Many carriers rely on claims adjusters to refer the claims to the subrogation department, which requires manual effort and leaves the door open to errors in judgment or lack of motivation.
In addition to adjusters’ omissions, staff members who initially record a customer’s claim can contribute to missed opportunities. If specific, critical information is not captured at the time of claim intake, staffers may not recognize subrogation potential.
In many cases, the in-built system rules to identify subrogation potential are static in nature, leading to missed opportunities or false flagging.
In more than one-third of potential subrogation cases, files are never studied for probable collection, or they are closed without any recovery taking place. Files are often closed for one of these five reasons:
- Incomplete documentation and evidence to prove the defendant’s liability
- The insurance provider lacks a proper collection strategy
- The carrier’s subrogation staff has no experience in collections
- The company lacks a system with proper metrics and performance monitoring
- Disputes, arbitration, and litigation files are not handled properly, resulting in a very low win rate
Managing the costs
Subrogation doesn’t just offer opportunities to maximize recovery from paying claims. By minimizing the cost to collect on subrogation efforts, insurance carriers can hold on to more of their profits. According to Genpact benchmark data, the average cost to collect can range from $200 to $400 per subrogation file. Even carriers with a strong record of recovery should work to minimize the cost they spend on subrogation collections.
For instance, many insurance companies have operating models that do not support cost-efficient subrogation processes. For instance, decentralized operations or multiple locations can require unnecessary costs. In addition, operating in a high-cost location or paying employees too highly can represent a misalignment of skill sets and resources.
Other factors that increase costs associated with subrogation include poor data and document quality compounded by a lack of ownership for the process. When many staff members are involved, but none take ownership of the subrogation claim, costs go up and subrogation opportunities can fall through the cracks.
To succeed at subrogation without skyrocketing costs, insurance companies need a strong, functional system and electronic collaboration. Without rigorous operations and strong metrics, efficiency and effectiveness suffer. However, by implementing a proper operating model and optimizing business processes, insurance companies can reduce subrogation costs by up to 50% and take greater advantage of subrogation opportunities.
There are a number of management solutions that can be applied to the subrogation function to improve results and build a company’s competitive advantage. First, improving the subrogation function begins with transforming the process with solutions such as:
With end-to-end process simplification and optimization, insurance carriers can improve straight-through processing as well as data and document quality at the same time that they reduce billing and collection cycle time.
Light-touch technology automates manual tasks that do not require decision making, such as creating subrogation packages, collecting follow-up emails, and allocating recovery.
Business intelligence dashboard
Companies can improve measurements and controls through automated performance measurement and reporting.
Through an electronic subrogation portal, insurance professionals can exchange subrogation packages electronically.
Insurance carriers can optimize collection and reduce the number of days and costs to collect by utilizing subrogation identification, segmentation, and collection-effectiveness models. For instance, a predictive model can identify subrogation potential, while other models can predict and maximize recovery amounts and collectability.
Smart shore solution
By centralizing subrogation operations, consolidating into one location, and moving operations into a low-cost location, carriers and claims organizations can reduce the cost to collect and improve efficiency.
By implementing the right combination of process optimization and technology, insurers can turn the often overlooked subrogation function into a driver of significant bottom-line impact as well as an area of real competitive advantage in the market.