Subrogation
subrogation Department personnel are known as the “bad boys” of the insurance company. They typically work as a part of the Claims Department and chase down individuals or companies that owe money to the insurance
company. If, for instance, an automobile accident occurs where someone other than you (the policyholder) is clearly at fault in damaging your car, or injuring you or other occupants in your car, your insurance company may directly pay you for damages, bodily injuries or medical payments.
However, your insurance company is then entitled to subrogate against the at-fault party. Since the legal system holds individuals responsible for damages that result from their negligence, the at-fault party must pay to make the innocent party whole. When your insurance company makes payment to you, they are then entitled to “step into your shoes” to recover payments from the negligent party who was responsible for your accident.
The first step in the subrogation process is to determine whether or not the at-fault party has insurance. While there are still many people who do not purchase insurance, the vast majority do carry insurance. The easiest way to determine whether an insurance policy is in effect is to send a letter directly to the person who caused the accident. The letter states that they are personally responsible for all damages to innocent parties; however, if they provide their insurance company information, their insurance company will be dealt with directly.
As someone who has had responsibility for subrogation earlier in my insurance career, I can attest that people are generally uncooperative when it comes to admitting their fault and in sharing their insurance company information. It is not at all uncommon to send three or more requests for information.
If the negligent party does not have insurance, he or she will personally owe the amount of damages for the repair of the policyholder’s banged-up vehicle, as well as medical payments, etc., and must ultimately pay any outstanding legal judgment on an out-of-pocket basis. Payment plans, including garnishment of wages, may be set up for repayment of what is owed.
More and more insurance companies are turning their attention to subrogation. Why is this? Because of the potential to recoup dollars paid out to policyholders. Some subrogation efforts amount to thousands or even hundreds of thousands of dollars. However, even small dollar amounts can add up to significant dollar amounts for insurance companies.
In addition, insurance companies are becoming more aggressive in pursuing certain specific types of subrogation. For instance, companies are recognizing the potential that Worker’s Compensation subrogation holds.
Insurance companies must pay Work Comp claims according to state statutes that generally demand payment on a “no fault” basis. In other words, if an employee is injured due to a work-related occurrence, insurance companies must make payment to the employee for the incurred injury. However, it is possible that the injury was the result of the negligence of a third party (unrelated to the employer). In this situation, the insurance company is entitled to demand payment from the at-fault third party. If the negligent party does not agree to make payment based upon the demand letter, the insurance company that made payment is legally entitled to bring a lawsuit against the negligent party.
Many times, outside collection agencies or attorneys are used for subrogation purposes where the potential of a large dollar recovery amount exists. Understand that these people can play hardball! In some of these types of outsourced subrogation situations, the subrogation firms are paid based upon a percentage of the total dollar recovery amount. As a result, they are aggressive not only in their attempts to receive payment, but also related to the dollar amounts sought.
Internal Audit
The Internal Audit Department reviews internal insurance company underwriting, claims, and other Department activities to make sure the various Departments within the insurance company are acting within company guidelines. Many times management requests that a certain underwriting line of business, or a particular type of claim adjuster file (i.e., liability adjuster), be reviewed to see if there are possible areas for improvement. Another reason for internal review of underwriting and claims files is to discover whether any wrongdoing (i.e., fraud) has occurred. Auditors look for both isolated situations as well as patterns of negative activities that have occurred. Auditors review files, note observations and make recommendations for change in the hopes of seeing improvements in the near future.
Internal audit also monitors things such as possible vendor (or agent, etc.) kickbacks to employees or expense report accuracy, and they ascertain whether employees are doing their jobs honestly. I have known of situations where claims adjusters invented a “dummy” corporation and then began making claims payments to their dummy corporation for building repairs—
while in reality pocketing all of the money.
I have also seen situations where agents take money from clients but keep the money and pay their clients’ claims out of their own private bank accounts. Here, insurance policies were never actually issued and the insurance company was unaware that the person had purchased insurance. Never heard of such a thing? Insurance companies rarely, if ever, report this type of fraud since it gives them very bad press and makes their other policyholders nervous.
Product Development
Insurance companies are a strange lot. They tout their differences and state reasons why they are better than their competitors. However, many times, companies sell very similar products at similar prices whether they are selling homeowners, automobile or businessowners policies. One of the reasons for this is that insurance companies often use the same rates and coverage language as their basis of coverage—items that are provided by the Insurance Services Office (ISO) or the American Association of Insurance Services (AAIS). Since the insurance policy is a contract, insurers are comfortable using contract language that has been “court tested.” While prior lawsuits provide valuable case law for insurance carriers, it also ties their hands when it comes to offering innovative products in the marketplace. The result is that many insurance companies sell nearly identical “black boxes.”
While customers might want a black-and-white box, the company says all it can offer is a black box, take it or leave it. Often times, the customer is either left unsatisfied, or continues to look for alternate ways to get what they want from an insurance coverage standpoint.
Most companies keep pretty close tabs on what their competitors are up to. If a new product is introduced by the competition, other companies typically wait for six months or so to see how well the product has been received in the marketplace. If the new product has generated decent revenues, while incurring limited claims payments, other companies in essence copy the new product that the trend-setting company introduced.
Everyone at insurance companies keeps their eyes and ears open concerning their competition, but typically it is the Marketing Department that feeds competitive information back to their insurance company management. Once the information is received, the Marketing Department
makes suggestions for change, if they feel it makes sense. Senior management from both Claims and Underwriting then either agree or disagree with the recommendation(s). If consensus is reached within the insurance company departments, the product idea moves forward through the Product Development team, and a new product is born. The proposed product is then reviewed by other departments, such as the Legal and Information Technology Departments, prior torelease.
Since some of the items developed are new to a company, there may be some ambiguity concerning exactly what coverages are intended to be provided. As a result, there can be a period of time after a new product’s introduction when the Claims Department has internal discussions concerning whether or not certain claims that have been made should or should not be paid by the insurance company.
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Information Technology
Programming of new products by the Information Technology Department (IT) is an extremely important part of the introduction of new insurance company products. In fact, this single department can cause a new product to be put on hold for a short time, or even indefinitely. Therefore, insurance companies often start the new product development process by having discussions with the Information Technology Department to make certain that they have the capacity to provide programming support for the introduction of the new product.
Keep in mind that insurance policies are basically issued as the result of software programming. Policy language, attachments (known as “endorsements”) and rating to achieve a price all result from software programming. Some insurance companies develop all of their own forms, which requires a large investment in IT programming dollars. Other companies purchase parts of their policy formatting or rating programs from
third parties. But no matter what approach is taken by insurance companies, the Information Technology Department plays a key role in their organization. There is always some kind of work for them to do.
The Information Technology Department at insurance companies operates in much the same way as the assembly line at a car manufacturer. This is the “guts” of the production process and this is the department that can bottleneck the entire insurance company organization. There are many more projects on the table than there are people to program requested changes. Time constraints, as well as computer system constraints, play important roles in what can be offered by insurance companies. In addition, insurance products themselves are much more systems-dependent than many other types of business products.
An example of one major project addressed by insurance companies was the “Year 2000” (Y2K) issue. It was a massive undertaking by insurance companies because it affected nearly every facet of their business—policy wording, agency contracts, suppliers and vendors, as well as simply requiring that insurance companies made certain that their future policies were issued with the correct dates.
In addition to providing programming for new products, the Information Technology Department is charged with maintenance of existing computer systems. This includes updating the software programs, addressing problems that pop up at individual workstations and solving a multitude of other technological issues as they arise.
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Management
It is impossible to talk about an insurance company without mentioning its Management. Companies are driven by the departments previously discussed. Some companies’ top management focus on claims, some on sales and some on underwriting. As a very general statement, many of the direct writer
insurance company top management focus on underwriting, while companies that sell through independent agencies tend to focus on sales.
Some decisions faced by insurance company management involve federal and state legislation. At times insurance companies attempt to impact future legislation in such ways as having lobbyists express their opinions to lawmakers. However, most of the time insurance companies react to legislation that has been passed. Insurance is a heavily regulated industry because it deals with the “public good.” As a result, laws pertaining to insurance change frequently. An example is Proposition 103, which passed in California several years ago. This law mandated insurance price rollbacks.
Other examples include the Terrorism Risk Insurance Act (TRIA), first passed in November, 2002, and reauthorized under the Terrorism Risk Insurance Extension Act (TRIEA) in 2005 and again in 2007 with the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), which extended TRIP through December 31, 2014. These laws require that the federal government act as a backstop in situations involving severe damage resulting from terrorist attacks.
Indeed, legislation has a huge impact on the insurance industry. In addition, the trend has been for regulatory bodies that are responsible for oversight of the insurance sector to become more and more liberal (pro- consumer) in their approach to dealing with conflicts that arise between insurance companies and consumers.
There are other factors that are beyond an insurance company’s control but can have a tremendous effect on its future profitability. New competitors can enter a particular geographic area or introduce a new or enhanced insurance product into the marketplace with very aggressive pricing. Existing carriers may need to match that pricing or risk losing market share. Unexpected catastrophes can strike several different times during a single year. Tornadoes, hail storms, hurricanes, terrorism, as well as large losses can deplete a company’s surplus.
Large losses are defined differently by each insurance company. For some, it may be a claim that exceeds $10,000 paid out. For another insurance company, it may be defined as losses that exceed $100,000. Rest assured, however, that any loss that reaches the limit of insurance stated on the policy declarations page (generally the first page of your insurance policy—where a summary of limits and coverages are shown) is considered a large loss. When a loss exceeds the limit of a primary insurance policy (the policy that pays
So, keeping these factors in mind, I have a question. Why do a great number of insurance companies obsess over strategic planning as far as five to ten or more years into the future? I have yet to figure that out.
Of course it makes sense to develop action plans to address things that are currently happening or things that might happen up to two years or so in the future. Included in this planning process timeline should be things such as the possibility of entering additional states, business product re-focus and the prices (rates) that will be charged for products. However, my experience has been that insurance company management often spend an inordinate amount of time trying to guess what will happen in the general marketplace, what will happen to the overall economy, future government regulation and all kinds of other things when there is no way to accurately predict the outcomes. Seldom does anyone correctly guess what the future holds for insurance—or for anything else.
How many people called the late-2008 ultra-bear market and the corresponding vast economic meltdown and economic recession? Did anyone foresee the terrorist attacks of September 11th that forever changed so many things in the United States? My point is that you might be lucky enough to have a good guess once or twice, but that’s all it is— a guess. Yet, there exist some strategists who are so foolish that they actually believe they can determine and plan accordingly for the long-term impact that certain future occurrences might have on the insurance industry. Please give me a break! Better yet, insurance company management should give insurance customers a break and do something more worthwhile to earn their salaries.
One area of management decision-making that I find particularly disturbing concerns the best way to run insurance company operations. Some companies feel it is best to centralize operations. This means that most of the work (claims, policy issuance and underwriting) will be done out of one centrally located building. A year or so later, these same managers, or perhaps different managers who might currently be running the same company, then decide that it would be best to de-centralize their company operations by having multiple operating locations. Back and forth it goes with no ultimate cost savings realized on the insurance company’s bottom line.
Another area that is constantly changing is how work is done within the
confines of the insurance company. An insurance company may choose to have very linear, defined departments. An example of this is a company that has only underwriters in one department, claims adjusters in another department, marketing people in another department, etc. This same company may later decide that it would be good to have teams comprising underwriters, claims personnel, and marketing representatives sitting close to each other and interacting frequently. Management might then decide to go back to their original internal structure, or some combination of the two.
Please don’t get me wrong. I believe that change can be good—especially at stodgy, conservative insurance companies. However, I have seen too many first-hand examples of significant change predicated upon non-logical, emotionally-based decisions. For instance, a national insurance company opened a large regional office simply because the senior vice-president they had hired to lead the office wanted to be located in a specific city and state.
Round-and-round it goes, where it stops nobody in insurance senior management positions seems to know. Inordinate amounts of money are spent changing where business is done and how it isdone.
In some ways, it appears that the more something costs, the less attention it attracts. For example, an insurance company I previously worked for changed our company name only to later find out that it was too similar to the way another insurance company spelled their name. We were subsequently sued to cease and desist using our new name. Everything that contained our new name had to be changed. Think about the time and dollars involved, from re- programming to changing contracts and letterhead and so much more. To this day, I wonder about the ultimate cost of this major faux pas. I know that mistakes happen. However, how many senior managers, attorneys and others were involved with this decision? It would seem that someone along the way might have raised a red flag before final approval was made.
Another thing that insurance company management is sometimes guilty of is focusing on small, somewhat insignificant matters while losing sight of the big picture. For instance, supervisory level (and lower) might be instructed to make every attempt to keep expenses down. An example would be to avoid spending more than $50 per night at a hotel, or to make certain that all travel involving the purchase of airline tickets be scheduled two weeks or more in advance to save on the cost of plane tickets. This certainly makes sense. However, senior management at the same company may have no such constraints and are free to purchase airline tickets on a whim within 24 hours
of the date of travel. This one occurrence negates the savings of several tickets purchased two weeks in advance. I understand that rank has its privilege to some extent. However, the bottom line is the bottom line. Management should not be above contributing to the financial success of the company.
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