Can powerful analytics replace subrogation?

The insurance industry is on a journey for digital transformation, modernizing core systems and embracing technology to bring together providers that can enable them to deliver more efficient and personalized experiences to policyholders. At the heart of this transformation is successfully accessing data and turning it into robust analytics for decision-making purposes.

Claims departments have been at the forefront, producing extremely dynamic reports that help the C-suite optimize profitability within the carrier. And more recently, advanced technologies have been extremely useful in optimizing claims handling decisions to the point where decisions are measured in minutes instead of days or weeks, across various touch points.

However, not all parts of a claim have benefitted from such rich decision-making power, leaving carriers with an incomplete picture of the claim through its lifecycle, including the various claim features, their subrogation potential and how that ultimately impacts the total claim cost. Subrogation, often addressed at the end of the claims process, is one area ripe for transformation.

To demonstrate the point, ask yourself a simple question: Is my organization trading the same money back and forth with another carrier on a monthly basis?

As an example, if two similar vehicles valued at $6,000 each get into a collision at a four-way stop and liability is questionable, each vehicle’s carrier, assuming a 50/50 liability determination, is liable for their insured’s $6,000 in property damage as well as the $3,000 subrogation claim from the other carrier. However, since each side is going to pay out a net $6,000 anyway, why don’t they simply agree to not pursue subrogation against each other, thus saving the time and effort of sending $3,000 checks to each other?

Understanding the potential outcomes for this claim at the outset is incredibly valuable. However, siloed claims management has made that difficult. Leveraging advanced technology to provide transparency across the various silos means claims can be identified upfront and provide the first-party adjusters additional information to assist in prompt settlement, potentially avoiding subrogation entirely. The ultimate effect is a reduction in the total cost of the claim and balance in APD and subrogation metrics.

The one open question for this scenario is how to recover the policyholder’s deductible if subrogation doesn’t occur.

If the answer to the trading dollars question is yes, then there are potentially some incredibly profound actions to be taken to help get your subrogation organization operating as efficiently and transparently as other areas of claims. Reasons to focus include:

• Strategic subrogation decisions have a direct impact on first-party claims handling, so decisions you make for subrogation can speed claims handling for larger volumes of claims.
• Subrogation is a place where you can have outsized results when you compare dollars recovered or saved vs. dollars spent.
• Subrogation is a back-office activity without direct touch points to the consumer, removing some of the complexity that can come with consumer-facing process changes.

These reasons make subrogation a low-risk, high-return opportunity for digital transformation.

Current state of subrogation claims

Most subrogation departments report on the same metrics that have been in place for years: referral rates, recovery rates, gross recoveries and the like. For personal lines insurers, if you can recover 10% of your total paid auto losses and/or a substantial number of property losses through subrogation, that has a substantial impact on total profitability. To get there, insurers need to address several common challenges.

1. First Notice of Loss (FNOL) — Routinely, there are newer, less-experienced workers taking FNOL information, which can result in missed opportunities to identify subrogation upfront. That can mean insurers may lose their pro-rata share of any recovery (in auto) and that can also mean that they don’t identify third-party liability quickly enough to act on it (in property). In worker’s compensation, there are some unique challenges related to third-party liability detection as well as the long-tail nature of many workers’ compensation claims.
2. Spoliation — Unpreserved evidence related to the claim can make it difficult if not impossible to pursue recovery. Spoliation is primarily an adjuster experience and training issue, so with higher-than-average turnover, accelerated retirements of experienced staff and cuts to training budgets, there is a direct downstream effect on the extent to which spoliation affects subrogation recoveries.
3. Made-Whole Legislation — Most states have some version of a made-whole doctrine and the case law that details to what extent it impacts subrogation. An easy example of the most extreme version of this is when a person is injured and hires an attorney who then keeps 33% of the judgment as their contingency fee. In the eyes of some states, that injured party will never be “made whole,” which then effectively bars any subrogation action from taking place.
4. Arbitration — Maintaining swift timelines to support complex dispute resolution is essential so as to not delay the settlement process.
5. Uninsured/Underinsured Limits — This is a hot-button issue, as states want to keep insurance rates low for their citizens. However, when average used car prices are estimated around $30,000 but the insurance limits required are only $5,000, it creates an immediate disparity in how costs are allocated. Another significant issue is that up to 50% of all auto subrogation cases in some states are against uninsured drivers. The ability to successfully recover against these drivers is incredibly difficult and expensive.
6. Payments — The industry still largely depends on paper checks with an average cost to issue standing at about $6 per check. Digitization can deliver an immediate opportunity to realize tens of millions in savings when you extrapolate that number for the entire industry.
7. Data — It is challenging for adjusters to understand what data sources are available and the level of complexity (i.e. cost) to access for a given claim. For example, newer vehicles with cameras can store several seconds of pre-event data, which can be downloaded with a thumb drive. Most adjusters are familiar with vehicle “black box data” which has included pre-crash information for several years. However, vehicle control history (VCH) information, multiple mobile driving apps and other driver-assisted technologies can provide a wealth of information that can support immediate decision-making, including liability, total loss, drivable vs. non-drivable, identification of 3^rd party involvement, subrogation potential, fraud indicators and more, with an immediate display of the cost/benefit analysis. The scenario is similar across auto, property and workers’ comp as today’s IoT-enabled devices stream data reporting on the functionality and health of vehicles, appliances and humans. In an ideal state, an adjuster would get a comprehensive set of data points to review, as well as a curated list of questions to create a higher-quality claims adjudication process.
8. Asset Use — With the changing dynamics of personal assets being used for commercial purposes (Uber, Lyft, Airbnb, VRBO), it can be difficult to distinguish between personal and commercial use at the time of loss, which changes liability and creates questions around which policy covers a loss.
9. Deductibles — As deductibles continue to increase, there is a concern that policyholders also have to become claim handling experts, since they have a significant financial exposure. Any claims where a subrogation opportunity is “lost” can have significant contractual ramifications.

Many of these areas are ready for digitization and re-imagination, with some leading insurers already addressing these challenges. Robust operational processes and identification models are at work today to ensure subrogation opportunities are identified. Carriers are also embracing workflow platforms that help with subrogation demand generation and the paperwork shuffle that is a common feature in subrogation claims. Outcomes from leveraging these technology innovations include increases in net recoveries as well as significant reductions in the manual workload of their staff.

Subrogation next

As insurers look to utilize subrogation automation or advance their current efforts, there are a few “north star” ideas to keep in mind.

1. It is increasingly cost-prohibitive to maintain the manual processes that exist in today’s subrogation environment. When looking across carriers, the replicated cost structures to simply facilitate carrier-to-carrier processing are evident. Applying technology and leveraging ecosystems to automate much of this business-to-business communication and reconciliation can dramatically reduce costs for all involved.
2. Automation supports the need for much more granular reporting, which we know as an industry is essential to inform decision-making. More information and insights open opportunities for carriers to know more about the opportunity within their particular business and set relevant goals.
3. Subrogation would greatly benefit from increased transparency. There is a lot of ambiguity around when, how and where you can pursue subrogation. Waivers of subrogation clauses are excellent examples, as they are common within construction contracts, lease agreements and many other commercial contracts. When there is ambiguity, you may have higher costs to pursue, including the involvement of legal counsel, investigation costs and the like. Providing greater transparency across the industry reduces the total costs for everyone. Without subrogation opportunity, risk ratings have to be recalculated to manage that risk that will now be solely born by the first party and will cause higher premium rates. Accountability and paying what is owed can help keep insurance rates low.
4. Look for ways to increase training to assist junior adjusters in growing their knowledge and developing an investigative mindset. This can help identify potential subrogation claims more efficiently and earlier in the process.

True digital transformation in subrogation is an achievable goal and could streamline the multitude of steps that take place today; leveraging platforms and user interfaces that deliver key information in an obvious way and providing recommendations for what actions should be taken.

We need to think differently and consider truly transformative opportunities where they exist. Through automation and a connected fulfillment network, Amazon took the time it takes to get a shipment on a truck from 18 hours to two. Subrogation has strong potential for radical change and should be viewed as a strategic investment opportunity, not only on its own merits but for the greater benefits that it will ultimately provide to the first-party claims processes. Needless to say, providing timely deductible reimbursement is a great customer experience.

Timothy D. Christ (tchrist@cccis.com) is a well-known claims expert and speaker and has published two books. He is the senior solutions engineer for CCC Safekeep, CCC Intelligent Solutions’ AI-powered subrogation platform for auto, property and workers’ comp.

Related:

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Why subrogation is more than a final box to check