At a recent meeting of insurance financial managers, a leading insurance company CFO made the following summation in his presentation: all roads lead to finance; there are great opportunities to add value through finance; and financial staff must be ready, willing, and able to seize those opportunities.
Financial issues can become a serious vulnerability for non-finance managers. Turf always has been a concern in insurance company operations. Underwriting, claims, and finance are vying for control.
What about the company? All parts of the insurance operation should be doing what is best for the company, rather than focusing on individual agenda. The financial well-being of the company should be foremost.
The claim process is a major element of insurance finance. It controls the largest flow of company money through the payment of insureds’ losses. Typically, the claim process also controls a significant company asset: paid claims that result in the transfer of subrogation rights to the company. Recognition of this asset and implementation of the necessary steps to exploit it are crucial to achieving a well run operation.
The traditional approach to subrogation no longer is acceptable. The asset value of subrogation means that it can be capitalized or, in other words, immediately converted to money. It can be financed in whatever form fits a situation, it can be purchased, or it can be treated in a hybrid fashion, but it should never be overlooked. If the identification and preservation of subrogation opportunities are delayed, money is lost. If the receipt and investment of subrogation recoveries are delayed, money is lost.
No claim manager tolerates paying excessive claim dollars. Too frequently, however, subrogation has been an afterthought. It is still company money that, ultimately, affects loss ratios, premiums, surplus, and profitability.
The reason that these opportunities are easily missed is that subrogation seems contradictory to the traditional claim process. A claim professional tries to preserve assets, while a subrogation professional pursues and recovers assets. These are opposing activities; hence, the mindset differs for each. Even when claim personnel pursue subrogation, the process has several flaws.
Subrogation often is secondary and an afterthought when managing claims. The thought process of pursuing a claim is not conducive to the simultaneous pursuit of subrogation claims. In other words, the age-old adage about killing two birds with one stone does not apply here.
Many of the best subrogation efforts require early intervention, parallel to the claim process, before the subrogation trail is cold. When finally pursued, after a claim has been settled, the best possible window of opportunity has closed.
Too many subrogation efforts by claim personnel become all-or-nothing goals, overlooking middle-of-the-road, solid business opportunities. The all-or-nothing approach can lead to a loss of time, money, and efforts; an endeavor that too often ends in discouragement. In each case, diminished return must be continuously monitored before good money is thrown after bad.
Just like any other trade or profession, subrogation requires unique skills. Few claim administrators possess these skills or are prepared to put forth the necessary time and effort to acquire them.
An experienced and specialized subrogation professional can identify a singular claim that has the most potential for profit and recovery. An initial consideration is whether a claim is still open or whether it already has been closed.
Among the factors that a subrogation professional would review when deciding what files to purchase are:
- What expenses will be involved (e.g., lawyers, internal time and effort, litigation fees, and outside experts or other specialists)?
- What are the potential risks?
- What comparative liability issues may affect subrogation returns?
- What is the cash return of a subrogation effort?
- How much time will it take to subrogate?
Once all the factors have been analyzed, the specialized subrogation professional can place an expected subrogation value on each claim. When an offer to buy a batch of claims is presented, reflecting the subrogation professional’s assessment of the factors listed above, the price quoted is designed to cover all the specialist’s costs and efforts, hopefully for profit. The benefit to the seller is immediate payment, without recovery expense, overhead, or risk.
The administrative benefits are significant. The costs of internal subrogation efforts are far greater than commonly recognized. Expertise, focus, and incentive are difficult to establish and maintain in the insurance company environment.
Pricing a claim for subrogation is more art than science, which is why consulting someone who is focused solely on subrogation is essential. In science or mathematics, a formula can be plugged in, and anyone with a working knowledge of the project could move forward. With art, it not only takes a working knowledge of the task at hand, but creativity, adaptability, and the ability to comprehend all the variables that go into beautiful work.
With so many variables, there always is a risk that the price will not cover the expenses of pursuit. That is the purchaser’s concern. A subrogation effort should not cease until all parties involved agree that every possible avenue and opportunity have been exhausted. Essential and pertinent evidence is concisely preserved, with the sole purpose of maximum recovery.
No one ever gets a 100-percent recovery, whether a subrogation specialist or claim administrator is leading the pursuit. Overall, the time value of money, the lack of subrogation overhead, and the recognition of all subrogation potential will result in immediate, maximum net recovery. The subrogation owner absorbs the expenses of recovery but, with the ability to sell subrogation rights to a specialist, a company can close files and fix final claim costs. In the risk assumption world, this certainty should be quite attractive.
Paul Fershe is president, Capital Division, of Subrogation Partners. He can be reached at firstname.lastname@example.org.