Top Three Reasons Subrogation and Arbitration Processes Underperform

 

Traditional subrogation and arbitration teams are leaving over 20% of potential savings on the table each year.

That additional 20% equates to millions of lost recovery and defense dollars, yet insurance carriers across the nation continue to struggle with unlocking those potential savings trapped in their subrogation and arbitration processes.  A study conducted by the National Association of Subrogation Professionals (NASP) has stated that successful subrogation processes are able to recover up to 25% of paid losses but very few companies actually achieve that level of success.

What barriers are inhibiting these companies from achieving their true subrogation potential?  The primary causes are linked to three root issues:

1. Incorrect personnel doing the work
2. Lack of a sound and disciplined process
3. Lack of corporate strategic support

Let’s talk through each of these primary barriers and offer alternatives to effectively eliminate them.

1.  Incorrect Personnel

The most significant barrier to successful subrogation and arbitration is the personnel enlisted to pursue those interests.  Traditionally, the insurance industry has viewed subrogation as nothing more than an insignificant offshoot of the claims function, staffing the team with underperformers or worse yet, new employees unfamiliar with subrogation and arbitration.  This approach simply does not generate satisfactory results.    While it may seem like a logical way to address the company’s needs given claims adjusters’ intricate knowledge of the claims process, their involvement actually creates some fundamental shortcomings that negatively affect the subrogation and arbitration processes’ success.

• The mindset of a successful claims adjuster is fundamentally different than the mindset of a successful subrogation or arbitration specialist.  The lists below demonstrate the key differences.

Claims Adjuster	Subrogation/Arbitration Specialist
Defense Minded	Offense Minded
Customer Focused	Company Focused
Loss Control Center	Profit Center
Quick Resolution	Quality Resolution
Insured is always liable	Insured is never liable
Ins. Co. should pay minimum allowed	Ins. Co. should pay maximum allowed
Avoid conflict unless absolutely needed	Expect conflict and thrive in it

The fundamental challenge is switching a defense-minded claims adjuster to an offense-minded subrogation specialist.  By failing to realign their outlook away from the classic claims mentality, the claims adjuster ultimately limits subrogation and arbitration potential by failing to recognize, pursue, or properly negotiate legitimate recovery and defense opportunities.

• While claims adjusters possess the claims knowledge needed to pursue subrogation and arbitration claims, claims adjusters often lack the other skill sets needed to be truly successful in those endeavors.  Subrogation and Arbitration goes far beyond collection activities.  Specific skills needed to be successful include:
  • Sound legal knowledge and research
  • An advanced level of persuasive writing
  • Superior negotiation skills
  • Strategic thinking
  • Creative problem solving
  • Relentless drive and persistence
  • The ability to work and thrive in conflict

Without a team having the proper skills to be successful, subrogation and arbitration results will never be anything more than average.  While definitely not a place for underperformers and new employees, companies should think critically to ensure their subrogation resources have the right skills. 

2.  Inefficient Subrogation and Arbitration Processes

The second most significant barrier to subrogation and arbitration success is the lack of sound and disciplined processes around those business functions.  The subrogation and arbitration processes are two of the most neglected processes within the insurance industry and have notorious reputations for being manually intensive, inefficient, redundant, and filled with missteps.  The situation is then typically exacerbated by a complete lack of tracking, reporting, and analysis of the processes.

3.  Lack of Corporate Strategic Support

If subrogation is able to recoup 25% of paid losses, why are the subrogation and arbitration processes not receiving more attention?  The fact of the matter is that while subrogation can make a significant impact on a company’s profitability, the needs of the subrogation and arbitration processes are simply outweighed by the needs of the company’s core competencies: Marketing, Underwriting, Investment and Claims Adjusting.  These processes monopolize the majority of insurance dollars along with the executive mind share and the result is subrogation and arbitration processes that are underfunded, underdeveloped, and underperforming.  This lack of strategic support further manifests itself in a lack of tools to support the processes, low salaries, and a lack of incentives to attract, retain, and motivate talented individuals in those areas.  It is a perpetual cycle of underperformance leading to undervaluation leading to underinvestment.

What is the solution to overcoming these barriers?

Driving success in the subrogation and arbitration processes requires a shift in the corporate culture regarding these functions.  Companies will not begin to see significant performance from these processes until subrogation and arbitration are seen as significant contributors to the organization’s financial goals.  Once subrogation and arbitration are elevated beyond a cursory thought in the claims process, there are three approaches that can be utilized to drive performance:

1. The Internal Approach – The carrier segregates their subrogation and arbitration processes from the claims department, staffs experienced subrogation and arbitration experts (not claims adjusters), re-engineers their subrogation and arbitration processes, and invests in productivity tools needed to drive efficiency in those pursuits.
   • Pros – Maximizes recovery for the company, retains control of the processes in-house
   • Cons – Requires a complete cultural transformation regarding subrogation and arbitration, considerable up-front investment in capital, time, and manpower, long time to realize the benefits, the company will inevitably experience a learning curve as the process is refined, company retains the costs associated with managing and executing those processes, distracts the organization from their core functions
2. The External Approach – The carrier outsources their subrogation and arbitration processes to an experienced subrogation and arbitration firm.
   • Pros – Immediately gains proven and disciplined subrogation and arbitration processes with little out-of-pocket costs, higher recovery than the current processes, eliminates the costs associated with managing and performing these activities, no radical organizational changes are required, investment dollars and resources are not diverted from the company’s core functions, can be successfully implemented without a massive shift in corporate attitude toward subrogation and arbitration
   • Cons – A portion of the increase in recovery will be reduced by vendor contingency fees, decentralized workforce, possible political concerns, a vendor needs to be selected and selection can be difficult (company needs to focus on vendor results and service fees to ensure the vendor actually generates additional value)
3. The Hybrid Approach – The carrier partners with an experienced external resource to design and implement new subrogation and arbitration processes that will still be operated in-house.
   • Pros – Internal resources are not consumed with the development and implementation of the processes, best practices are brought to the organization “pre-built”, improved recovery assuming the appropriate staff is acquired to execute the new processes, strategic functions remain in-house, less strategic functions are shifted to a lower cost operating model
   • Cons – Larger initial financial investment ( offset in the near term by better results), requires ongoing costs of managing and performing the subrogation and arbitration functions, company incurs the costs needed to attract and retain talented subrogation and arbitration specialists for strategic functions, requires a large culture shift regarding subrogation and arbitration

Conclusion

The barriers inhibiting insurance companies’ subrogation and arbitration success are unfortunately self-inflicted.  In this current environment of “doing more with less”, there are too many competing needs within the company, internal resources are stretched too thin, and subrogation and arbitration have fallen by the way side.  As a result, the subrogation and arbitration processes suffer from incorrect personnel pursuing these interests, a lack of disciplined and effective processes, and an overall lack of corporate support.  These barriers must be overcome for companies to unlock the true value trapped in their subrogation and arbitration functions.  Consider each of these three options to improve your subrogation and arbitration results.

1. The Internal Approach
2. The External Approach
3. The Hybrid Approach

Himes Consulting Group can help improve your subrogation and arbitration results guaranteed!  With our unique subrogation and arbitration services and our proven implementation experience, Himes Consulting Group can help you drive performance in these often overlooked processes.  To learn more about our subrogation experience, please contact Rob Himes at robhimes@himesconsulting.com or visit our website at www.himesconsulting.com.