Why improving subrogation may be more valuable

November 2, 2020 / 4 min read

Property/casualty insurers have traditionally focused on obtaining new policyholders as a critical avenue for growing their businesses. But when it comes to profitability, adding a new policy may not be the best way to boost the bottom line.

While increasing your customer base is important, it may not give you the most bang for your buck. Insurers could potentially achieve much greater profitability by putting resources into improving their subrogation performance. In fact, even a small increase in net subrogation revenue may be more profitable than issuing a new policy.

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It’s time to shift the perspective of subrogation—from a back-office function to a vital profit center for insurers. Let’s examine why insurers should reprioritize recoveries.

Counting the costs: New policies vs. more recoveries

Insurers face stiff competition to acquire new customers—and high costs. Consider this: the average per customer acquisition costs for the industry is estimated to be $500-800. It also generally costs insurers seven to nine times more to attract a new customer than to retain one. With the steep price required to add new policyholders, it could be more profitable to improve your subrogation recoveries.

Let’s look at a hypothetical example in the auto line of business. Imagine a carrier secured a new policyholder with a $500 premium. Assuming a 95 percent combined ratio, the carrier would realize a $25 profit from the acquisition of that policy. But imagine if the same carrier could recover one additional payment of $2,500 from boosting its subrogation efforts. It would take 100 new policies to equal the profit from just one subrogation recovery.

Value of a Subro Dollar

We can use the same approach for a property policy. Assuming a 99 percent combined ratio, if a carrier adds a $2,000 policy, they’ll realize a $20 profit from that policy acquisition. But let’s say the carrier was able to recover an additional payment of $5,000 in subrogation. It could possibly take 250 new property policies to equal that one recovery. Clearly, the math points to significant benefits from improving subrogation efforts.

Better training, better subrogation

So, how does a carrier improve its subrogation to realize greater profits? Training and educating staff is a critical first step. Effective subrogation requires three key skills:

liability analysis
negotiation
the right mindset

If insurers can improve the application of comparative liability, it can lead to higher recoveries. Subrogation professionals must be properly trained in the nuances of state negligence laws and product liability, as well as have access to better data to argue for a more favorable liability apportionment.

Strong negotiation skills combined with an assertive subrogation mindset are also critical to improving recoveries. Staff should be aggressive in pursuing recoveries, shrewd in negotiations, and adept at using facts for leverage in claim settlements. Organizations that train their staffs in these core skill sets establish a strong foundation for effective subrogation operations.

Data drives recovery efforts

Leveraging data can also enhance recovery efforts, particularly when insurers can incorporate historical subrogation outcome data into the claim investigation process.

For example, a claimant hits your insured’s vehicle while making a left turn and damages the driver’s side door. You can gather those granular liability facts along with historical data on the adverse carrier and adjuster you’re settling the claim with to understand how they usually settle similar claims. That information helps frontline adjusters identify subrogation potential earlier so you don’t miss out on recoveries. The same process can be applied to products to identify those associated with loss trends. Adjusters can use that data to identify liability issues early in claim investigation to recognize more recovery opportunities and avoid spoliation.

Companies can also use historical subrogation outcome data for internal productivity measurements and staff analysis to help manage performance, create performance incentives, develop best practices, and gain efficiencies.

Insights enhance expense management

Improving expense management is another way to boost your subrogation. Success in this area requires a combination of outcome data and a properly trained staff.

The more data you have on expenses associated with various recovery channels—such as direct negotiation, E-SubroHub, collection, arbitration, or litigation—the better equipped your staff is to make decisions to reduce costs and maximize recoveries.

For example, if you know that negotiations for a specific type of claim with a particular carrier tend to go to arbitration and becomes more costly for your company, you can take steps to settle those types of claims sooner and reduce costs.

The ROI of effective subrogation

Insurance leaders don’t often think of subrogation when it comes to increasing their profits, but they should. Investing in subrogation operations can yield a better ROI than acquiring a new policyholder. But it requires the right training, data, and expense management to increase recoveries.

Verisk has subrogation solutions to help you improve your recovery process. By leveraging industrywide data and automation technology, we help insurers identify potential recovery opportunities early and streamline the subrogation process.