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In the last several years, subrogation has received heightened attention within the insurance industry. This increased focus is driven by the growing need for insurers to enhance efficiency and ensure optimal recovery processes amid performance pressures.
While most efforts have focused on outbound subrogation - where carriers recover their money from third parties – inbound subrogation has not received the same level of attention, especially when it comes to resourcing subrogation teams, where establishing dedicated teams can significantly improve efficiency, reduce cycle times, and enhance overall profitability for insurers.
The job of inbound subrogation teams
Inbound subrogation involves insurers responding to third-party demands for reimbursement on claims where the policyholder is found to be not-at-fault. Managing inbound demands involves several major challenges, including:
- Generalized liability decision-making, as opposed to a detailed comparative negligence assessment on each driver.
- High percentage of subrogation demands going to arbitration.
- Prolonged cycle times of 60 to 120 days.
- Strains on staff capacity and experience.
- Reporting and benchmarking.
- Third-party administrator (TPA) management.
Multiple submission channels, multiple headaches
Today, inbound subrogation demand teams are also challenged by multiple submission channels (emails to the first party APD adjuster, emails to a central email address, fax, snail mail, and of course, entered into E-Subro-Hub) making it difficult for organizations to gauge the exact inbound volume. Without a clear understanding of volume, conducting a detailed analysis for effective capacity planning becomes challenging.
Evaluating underwriting profitability
For many standard lines carriers, inbound demands account for about 70-80% of their outbound demand volume*. Non-standard carriers can see inbound demands that are 120 to140% of their outbound demand volume, given the type of business they write.
To illustrate these dynamics, consider data from a top five and a top 150 carrier, using AM Best data on claims and indemnity trends. For larger insurance carriers, total collision claims volumes can exceed 1.26 million annually, with subrogation opportunities generally representing about 20% of this volume, or about 250,000 outbound demands per year.
Smaller carriers in the top 150 handle approximately 18,000 total claims annually, with outbound claims also making up about 20%, or about 3,600 outbound demands per year.
Both groups see an average outbound demand of $8,000 per claim, which translates to potential recoveries of nearly $3.1 billion for top carriers and $28.8 million for smaller ones. After adjustments, recoveries typically reach $2.63 billion for larger carriers and $24.48 million for smaller ones.
Inbound demands for standard carriers are typically estimated to be 70% of outbound claims volume. For top carriers, this results in 270,900 inbound claims annually, compared to 2,520 for smaller carriers. With the average inbound demand also at $8,000, total indemnity spend reaches $2.17 billion for top carriers and $20.16 million for smaller ones. After adjustments, potential savings amount to $325 million for top carriers and $3 million for smaller ones.
One way to measure underwriting profitability is to evaluate the ratio between outbound and inbound demands. This helps determine how often policyholders are causing accidents and the amount of damage compared to how often they are being hit.
Analyzing these trends over time can determine if the business being written is “good business” or “bad business,” whether premium adjustments are appropriately compensating for these differences, and whether these drivers have been placed in the appropriate underwriting class.
*Inbound demand volume is highly dependent on the auto book of business. For example, many non-standard insurers will have higher inbound demand volume than outbound volume.
Regulatory & turnover challenges
An overarching theme from carriers is that first party adjusters are more focused on managing claims for their insureds due to customer satisfaction measurements. A third party claim is an interruption to their day and is typically given a lower priority.
High turnover among first party adjusters further complicates attention to third party claims, sometimes leading to the approval and payment of inbound demands without proper scrutiny.
Carriers have indicated that the turnover experienced in their first party APD teams has negatively impacted their subrogation referrals by up to 13%. It’s important for all organizations to have transparency and granular reporting capabilities on their subrogation metrics.
Impact of dedicated teams
Most large carriers have established dedicated teams to manage their inbound volume. They have quickly realized two key points:
- It makes justifiable business sense to set up a dedicated team to manage the $2 billion annually in indemnity spend in the above table for a top five carrier.
- Removing this responsibility from the first party team lets those team members focus completely on policyholder customer satisfaction and timely claims resolution and become “experts” on these types of claims, thereby maximizing indemnity savings opportunities.
However, given there are often insufficient internal resources and expertise to manage in-house, engaging a third-party administrator often makes the most sense.
Some carriers have either partially or completely outsourced this process to various third-party vendors. While this makes sense at a certain volume, insurers often prefer to bring that activity back in-house once it reaches a certain level. Carriers have also indicated that subrogation vendors vary widely in their results, showing anywhere from a 20% to a 90% claim closure rate.
Savings opportunities
The question frequently emerges about what savings opportunities exist for inbound demands. Coverage, liability apportionment, unrelated prior damage, parts selection, labor rates/hours, repair methodology, total loss conditioning, betterment, other estimate line items, rental car days, storage fees, towing fees, administration fees, sublet fees, and charges without support (such as a car seat reimbursement without an invoice) are commonly reviewed and audited within these inbound demands.
We can make it look like this:
The question frequently emerges about what savings opportunities exist for inbound demands.Those savings can include adjustments to any of the following:
- Coverage and/or liability apportionment
- Unrelated prior damage
- Parts selection and associated labor hours/rates
- Repair methodology
- Total loss conditioning
- Betterment
- Advance charges such as rental, storage, towing, administration fees, loss of use, sublet fees, and other personal property expenses
From the charts above, the level and breadth of expertise, as well as the ability to stay on top of current industry trends, are crucial, to making timely strategic decisions.
Subrogation trends
As CCC continues to monitor subrogation trends, data has shown a drop in recoveries post-COVID due to fewer parking lot collisions.
In-house or outsource?
To evaluate whether an in-house or third-party team is the optimal model, carriers should consider the following:
- Conduct an internal review to understand total indemnity spend and operational costs.
- Document peer carrier behavior to gain insight into similar metrics and processes.
- Determine best-in-class indemnity spend and operational costs specific to the make-up of the auto book of business, claim volume, average demand size, etc.
- Evaluate company goals for 2024-2025 to identify potential alignment for savings and/or operational improvements.
- Develop and execute a plan.
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