Third-Party Deductible Recoveries Add Up To Millions For Insurers

Explaining that TPDs can exist whenever a claim is paid to someone not named on an insurance policy (in lines like general liability, workers' compensation, auto liability and also professional liability), he said the collection process is "notoriously poorly managed" by insurers.

The recovery process, he said, is typically managed by claims adjusters, or through a central collections function in the accounting department that pursues TPDs tracked by the company's claims administration system.

Ironically, one reason recoveries aren't pursued by claims adjusters is because they are focused on productivity and one of the measures of productivity is the number of claims they close, said Theresa Schugel, chief executive officer of Paragon. "It is not uncommon, then, for the pursuit of third-party deductibles to fall through the cracks," she said.

In addition, Mr. O'Loughlin said deductible amounts can be waived by the claims adjuster in negotiations with a policyholder. While the adjuster's electronic notes may reflect the waiver, an insurer's claims administration system typically won't have a code for waiving deductibles.

In those situations, Paragon would not pursue the TPD, he said, noting, however, that Paragon researchers would uncover the existence of the waiver.

Explaining Paragon's work in more detail, Mr. O'Loughlin said three primary services are offered: cleanup, outsource and past-due recovery.

A cleanup begins by going back in time with the estimation of deductible amounts that have never been billed.

A "Deductible Analysis Recovery Test" (DART) allows Paragon to make an educated guess of missed deductible counts and amounts by line of business going back five years, Mr. O'Loughlin said. A DART, he explained, is an analysis based on proprietary inference software, which costs the insurer $30,000.

"We have been able to convert every DART we've completed into a cleanup assignment," he said, explaining that a cleanup is the process of actually recovering missed and outstanding TPDs identified in DART on behalf of the insurance company.

"We become an extension of the claims department," Ms. Schugel said. "We interface with all the insurance company systems [in] a non-destructive manner," she added, explaining that as the cleanup operation progresses Paragon does not tie up a lot of resources within the insurer's operations.

"We simply tie into the company systems from Pittsburgh," Mr. O'Loughlin said, describing the process as non-invasive. And "we receive authorizations to pursue deductibles in the name of XYZ Company," he added.

In addition to the one-time $30,000 DART fee, Paragon is paid on a contingency fee basis for its cleanup service. While fees vary depending on the size of the assignment and other factors, Mr. O'Loughlin said a 35-to-40 percent contingency is typical.

He said that out of 36 DARTs completed by Paragon, only one ever grossly overestimated the missed deductible amount. Actual recoveries usually are within plus or minus 15 percent of the DART estimate, he said.

With respect to the cleanup activity, he said, Paragon typically recovers 70-to-80 percent of deductibles billed, within roughly 72 days.

In an outsource assignment, Paragon takes over the prospective administration of the TPD recovery process billing all TPDs on a going-forward basis.

Mr. O'Loughlin said that Paragon is performing prospective outsourcing work for 10 companies currently, and that contingency fees are typically in the range of 10-to-15 percent of recoveries.

On outsource assignments, Paragon recovers 92-to-95 percent of all deductibles billed, Mr. O'Loughlin reported, noting that the collections take place, on average, in less than 50 days.

"When we can't convince people that they've missed dollars, we can perform a past-due recovery activity," Mr. O'Loughlin said, noting that in this more limited type of assignment, the carrier has itself identified deductibles and tried to collect them. But after a certain amount of time has passed?30, 60 or 90 days they pass them to Paragon to pursue and recover.

Contingency fees for past-due work, he said, are generally about 20-to-25 percent.

Why would Paragon have success where companies have failed?

The activity is "front and center for us," Mr. O'Loughlin said. In addition, "we have some economies of scale as well as proprietary systems," he said.

Noting that Paragon recovered $40 million of its $136 million worth of TPDs in 2003 alone, and $36 million this year, he attributed increased activity to a number of factors, including more aggressive selling by Paragon.

Also, insurers are increasingly seeking to outsource noncore aspects of their businesses, he said. "It's a relatively straightforward sale. No head of claims has ever been fired because of poor TPD recovery."

Mr. O'Loughlin also chalks up increased use of TPD recovery services to insurers' increased focus on underwriting discipline.

"You want to have the policyholder participate in losses so that they have the same interest in minimizing them as the insurance company does," he said. Companies that got away from them in past years have moved deductibles back into their policies, he said.

So "they need a way of tracking and collecting" them, he said, noting that companies create pricing problems for themselves if they base their rates on an assumption (that a deductible will be collected) that the claims process doesn't follow through with.

Ms. Schugel said Paragon's biggest competitor tends to be the internal option. "The companies think that they can do it on their own."

In that regard, Mr. O'Loughlin believes Paragon adds value with its software taking a large population of claims and identifying the "manageable sum" of 30 percent or so that actually needs to be researched.

He noted that there are also other competitors that perform a collection function, but not this identification function.

Unlike pure collectors, "we will never threaten legal action" against a policyholder, he added, noting that carriers decide if they want to pursue legal remedies when Paragon exhausts its ability to recover a deductible.

In general, he said, every policyholder is "treated with kid gloves." They have never been billed, so they aren't deadbeats, he said.

Reproduced from National Underwriter Edition, July 29, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.