Canadian Underwriter
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Raising th Bottom-Line through subrogation efficiency


July 1, 2001   by Michael Baumel, head of global subrogation at GE ERC


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A fire races through a high-rise hotel. Firefighters deploy aerial ladders to reach the flames. Emergency personnel work tirelessly to rescue trapped guests and employees. Hours later, the fire is extinguished and the injured are treated at emergency rooms. Property damage will ring up in the millions of dollars. There will be casualties. As the smoke disperses and the dust settles, the hotel’s insurance carrier begins the task of assessing claim reports.

Something is wrong with this picture. “As the smoke disperses and the dust settles.” It sounds as if the hotel’s insurer was slow to respond. Unlike the fire department, they failed to act quickly and waited until the fire was put out before their claims adjusters put pen to paper. Too often that is the case. Insurance companies will activate their claims process hours, even days, after the catastrophe. It is a story of lost opportunities all around.

In a world where we place a premium on architectural innovation and engineering sophistication, building projects have become more complex. Dozens of contractors may work on a single construction site, and the result is more insureds own a stake in the effort and share the potential liability when catastrophe strikes. Too often, only one insured and insurer will bear the claim investigation and indemnity burden when in fact several should pay.

Costly liability

Let us assume that in the case of the above referred to “fictitious hotel fire” that the hotel’s insurer assumed responsibility for all claim payments. Much of that responsibility was ceded to the reinsurance carrier. Now fast-forward several months ahead. It is renewal time. The reinsurer and insurer sit down to discuss a new contract. Reviewing the insurer’s loss history, the reinsurer notes a particularly heavy exposure from the hotel fire. Personal injury suits are still being filed and the damages total in the millions as an entire wing of the hotel must be demolished and rebuilt.

The reinsurer will demand more restrictive terms and conditions of its customer, the insurer. To compound the problem, the hotel and its insurer will face additional liability as lawsuits arrive at the courthouse, litigation shifts into high gear, and damage awards mount. No one wins in this situation. The multitude of attorneys litigating their cases will face an increasingly uphill battle negotiating adequate damage payments from a single insured and its insurer.

Obviously, this is an extreme scenario. But the message is clear: Subrogation is a necessary part of the claims process, one which is often overlooked or under-utilized. It should be a vital business strategy in the area of risk transfer and analysis.

Claim resources

A second message is undeniable. Your reinsurer can assist you as the primary insurer to improve your subrogation efforts. GE is known for its “Six Sigma” program. It is an invigorating discipline that is applied to all GE businesses – from aircraft engines to services such as reinsurance – which aims to reduce errors and improve efficiency. At GE ERC, we have applied this process to subrogation with significant success.

As reinsurers, our business is not limited to collecting premiums, assuming risk and making claims payments. Somewhere in this cycle of business, a more analytical and customer solution-oriented approach is warranted. In that respect, GE ERC’s attitude is to leverage its “intellectual capital” to better improve client relations through claims management assistance.

This is done by offering a “consultative role” to our primary customers. Analysis is made of claims processes, identifying the defects, and recommending improvements. In some cases, we may recommend that a customer turn to outside counsel for help monitoring claim files.

Applying metrics and setting benchmarks are critical to improving any claims’ subrogation effort. Industry-wide, the average recovery ratio is 2%. That is the total subrogation dollars recovered divided by the total losses paid on a particular line of business. An insurer with a ratio of 0.6% therefore needs to look for ways to improve that number. The top players in the industry will achieve a ratio of 4%.

Those are some basic numbers, but nevertheless they illustrate the difference a thorough and effective subrogation process can make. Let us say an insurer pays $160 million in property claims. With a subrogation goal of 0.6%, which means it stands to recover $960,000. Push that goal to 2%, and the insurer stands to recover an additional $2.24 million for a total of $3.2 million.

React early

We often recommend that our customers identify subrogation opportunities early in the game. Do not wait until after the fire is put out. Unfortunately, many primary companies do not want to look at subrogation until after the claim payment has been made. However, those experienced in the industry well know that critical evidence can be destroyed or lost over time. And, just as importantly, the courts are now taking a tougher stance on spoliation of evidence. Early identification will eliminate the need to even think about going to court to recover evidence.

Making subrogation a priority rather than an afterthought can be a tough task, even daunting to insurers. With more emphasis placed on the bottom-line, some claims managers may feel that they can not commit the resources to it. Having analyzed many client claims management operations, relative to caseloads in question, we often recommend outsourcing as the best course of action.

Recently, a cedant client asked us for help with subrogation recoveries. We took an attorney we frequently work with to their offices, audited their files, mapped out their process and uncovered several missed opportunities. The client hired the attorney on a contingency basis to recover on the salvageable missed opportunities. We then made several suggestions to improve their process.

Not long after, a building owned by an insured caught fire. The attorney was notified and sent an investigator to the scene before the fire was even extinguished. The investigator arrived while the scene was still intact and found a faulty appliance that clearly had started the fire. The result? Not only was crucial evidence preserved, but the insured was protected from a liability claim which no doubt would have been compounded as a guest in the building had been critically injured in the fire.

Pro active position

This is not to fault the work of fire department investigators. Rather, that it is simply not their job to determine the exact cause of an accidental fire. Many fire departments we speak with admit that once they determine that a fire was not intentionally set, their investigation as to the exact cause is often closed. The bottom-line? Ask questions. Think “outside the box”. Never stop digging for additional facts and opportunities.

We are seeing an increasing number of insurance carriers making subrogation investigation and recovery a priority. GE ERC is taking this message beyond U.S. borders to primary customers in Canada, the U.K., and elsewhere in Europe. It is our hope that we can help our customers improve their bottom-line by adopting a harder line when it comes to assuming liability.


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