Subrogation, An Untapped Resource

Michael J. Moody

Editor’s Note: This is an adaption of the full article originally published in Rough Notes Magazine’s September 2009 issue. It is available via the Rough Notes Magazine Archives found in Advantage Plus.

As captives have grown and matured, many have begun to look for ways to improve their overall financial performance. While there are a number of ways to do this, one underused method should be investigated. That method is subrogation and, according to John O’Brien, JD, CPCU, CLU, an attorney and captive insurance consultant who specializes in subrogation, commercial insurers have found that it represents a significant revenue source.

He points out that subrogation has become a big business over the past few years, and many insurers have turned their subrogation departments into profit centers. Now O’Brien believes that it is time for captives to turn their attention to subrogation and start to “take advantage of the subrogation potential from their claims, similar to what commercial carriers have done.” Interestingly, the concept of subrogation is not new; it was recognized by U.S. courts as far back as 1782, and in the U.K. even before that.

Although the basic concept is relatively straightforward, subrogation is a highly technical area of the law. O’Brien points out that insurance companies have realized the importance of subrogation, and most have departments staffed with highly trained specialists to handle this function. One reason that a specialized group is required, says O’Brien, is the complex insurance regulatory environment and the fact that the specific guidelines and procedures governing subrogation often vary widely from state to state. Given this reality, he observes, “It is difficult to keep abreast of the various state regulations.”

Numbers tell the story

…the National Association of Subrogation Professionals (NASP) has developed industry benchmarks that provide some meaningful insight into the savings that are available via subrogation. For example, subrogation of auto collision claims represents about 25% of total paid losses for traditional insurers, while property claims subrogation can net 7% to 10%. For workers compensation…recovery via subrogation averages 5% to 7% of total paid losses.

… the lines of coverage that are most frequently involved in subrogation are auto collision and property coverage. Recently, general liability and professional liability, particularly medical malpractice, have been receiving significant attention with respect to subrogation. With the recent trend toward forming captives to be used in conjunction with high-deductible workers compensation programs, the subrogation potential is significant, particularly in…product liability, vehicle incident and other organizations’ premises.

Timely and affordable

The subrogation process offers yet another valuable benefit for captive owners…a popular method of resolving subrogation claims today is mediation and arbitration…these methods can expedite the settlement process. While maximizing revenue through effective subrogation certainly has direct, tangible results…it is not the only benefit…an effective subrogation program can be an aid in developing forecasting and actuarial models for the captive.

Summing up

A professional subrogation program can provide a ready source of ongoing additional revenue, as well as a cash flow boost of “found money” from a closed file review. Professional subrogation service firms can help a captive achieve optimal results in this endeavor. These services usually are provided on a contingent basis and involve no out-of-pocket costs for the captive owner.