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Found money Subrogation can enhance the bottom line for any ART program By Michael J. Moody, MBA, ARM There are several key elements to any risk transfer mechanism, regardless of whether it is insurance, a captive, or any other type of alternative risk transfer (ART) program. One of the most important and most costly elements is the claims process. Many people in the risk management community see the claims process as three steps: claims investigations, claims settlement, and claims payment. To be certain, all three of these steps are critically important to the overall financial success of any insurance enterprise. Unfortunately, there is one additional step that is frequently overlooked—subrogation. While there are any number of definitions, subrogation is typically defined as the process by which insurers or self-insured companies seek reimbursement of their claim losses from responsible third parties. Subrogation has an important place in the overall claims management process, but all too often it becomes the stepchild of claims. Typically, this represents a lost opportunity for an insurance company or for an ART account. Subrogation can provide a significant benefit by returning money that has already been spent. Subro 101 One of the reasons that subrogation typically doesn’t make it to the front burner of many organizations that use ART programs is that they do not realize just how valuable this process can be. So, at this point, you may be asking yourself, just how much money is involved in the subro process? While each situation is different, according to Erik Stremke, director of client development for Subrogation Division, Inc. (SDI), Spanish Fork, Utah, there are industry benchmarks that can shed some light on the amounts involved: • Workers Compensation—5% to 7% of the total indemnity dollars paid • Property—7% to 10% of the total indemnity dollars paid • Auto Collision—25% of the total indemnity dollars paid Depending on the size of the program, there can be significant dollar amounts associated with the subro efforts, particularly in the workers compensation arena. And the good news regarding this issue is that, not only is this a valid cost savings method going forward, but it can also be used retroactively for past closed claims. Stremke explains that most closed claims have good potential for about three years, which is the average statute of limitations that is in place in most states. Typically a review of the closed claims for the past three years will provide a good indication of recovery potential. However, the expense of recovery is another area that has been the source of some misunderstanding in the past. Most people believe that they have to incur significant costs just to pursue a recovery. But this is where the potential of subro really shines, because firms such as SDI typically work on a contingency fee basis. So in practice, what this means is that there is no up-front cost for the client, notes Stremke. He goes on to say, “Our whole structure is designed to be a win/win situation.” And in order to maintain that concept, he says, “Our clients have to win before we get anything.” Further, he indicates: “The most frustrating part of subro work is getting the potential client to recognize the true value of this service.” And as long as it was some type of self-insured or deductible type program, “they have already spent the money, and we can get some of it back for them. In addition, the way that SDI prices its services, we can get it back with no additional cost to the client. Once we show the prospective client the scope of savings, they realize what a value-added service this represents. For example, those organizations that may be considering a captive or risk retention group, a closed claim review of their first-party losses could provide a revenue source that could significantly offset the cost of capitalizing the captive.” Specialized experience required Many prospective clients are surprised at the potential amounts that are available via subro. “A number of them wonder how come similar returns are not available from traditional insurance claims departments or even third-party administrators,” Stremke says. But he also points out that most claims operations, regardless of whether it is an insurance company or a TPA, tend to focus on “closing claims in a timely fashion for the least cost.” And while many insurance companies have a subro department, as do most TPAs, few use best practice methods to achieve a high level of recovery. “It’s not too difficult to understand when you think about it,” Stremke says. “The skill set for subro guys is entirely different than for traditional claims people.” In fact, he points out, “When handling subrogation cases, you now become the plaintiff, and you are the one making the claims, rather than just settling them.” This takes a completely different mentality. Maximizing the recovery potential of a claim requires the services of specialized subrogation personnel. And since few organizations can afford to retain this type of expertise, they frequently outsource these tasks. SDI is a good example of a firm that has the needed specialized services since, as Stremke mentions: “This is what we do, day-in and day-out; this is all we do.” As a result, he says, “We don’t have any other distractions.” He also notes that since this is such a specialized service area of claims management, it is important to locate an independent contractor that has adopted a “best practices” approach to providing these services. Additionally, they should have specific experience working on subro assignments from various ART clients. The rubber meets the road According to Stremke, there is little required from a prospective client in order to begin working. Typically, SDI begins a client relationship with a closed claims review. At this point, SDI will determine the recovery potential for the claims that have been closed over the past three years. In order to complete this closed claim review, the client usually will only be required to provide detailed loss data for that period of time. While each assign-ment is unique, he states that the following timeline is representative of SDI’s work: • 0 to 30 days—Significant work is completed by SDI, but only about 5% of the total recoverable is realized. • 30 to 60 days—Still very active work is going on, and meaningful recovery numbers are beginning to show up. • 60 to 120 days—At this point, the client will have realized about 70% of the total recovery amount. SDI works with a wide variety of clients, everything from insurance companies to captives and risk retention groups. The experience of one of SDI’s insurance company clients is typical of their approach to subro projects. Utica First Insurance Company in Utica, New York, is a small regional carrier that has been working with SDI for the past two years, according to Ted Chmielewski, senior claims examiner. He points out that “by utilizing the services of SDI, we have found a cost-effective way to handle our subro opportunities without the need for additional staff.” He also points out that SDI provides the appropriate experts and specialists to quickly resolve their subrogation cases. Further, he notes that SDI has an excellent data capability, which provides for the easy flow of information between the two parties. “We have a great relationship with SDI, and we appreciate their proactive approach on our behalf,” Chmielewski notes. Conclusion There are few “win/win” situations in today’s business world, but utilizing subrogation services that are provided on a contingent fee basis may be one of them. And when it can have such a positive impact, it should be pursued. “A properly managed, comprehensive subrogation program can reduce the overall corporate loss ratio by two to three points, simply by pursuing recoveries,” notes SDI’s Stremke. And this is particularly true for those accounts that involve any type of ART arrangements. Although subrogation and claims management are inextricably linked, they are inherently different operations. And while the basic concept of subrogation is relatively straightforward, it is considered to be a highly technical area of claims management. In order to get the maximum benefits from any subro efforts, the services of subrogation professionals are required. This is a valued-added service that any broker/agent or captive manager should be eager to introduce to its clients. Because, as Stremke points out: “This is found money.” * For more information: |
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