When a large insurance company experienced some employee turnover in its subrogation claims department, it turned to outsourcing. All staff members in the department were actually experienced adjustors who could provide far more value to the company if redeployed out in the field to adjust claims. Their subrogation positions were subsequently outsourced to Afni Insurance Services (AFNI), headquartered in Bloomington, Illinois.
One year later, AFNI had collected more money on the subrogation claims than the insurance company had been collecting, and the company no longer had the cost structure of the subrogation department, increasing the profit even more.
Outsourcing doesn’t work well when both parties’ interests are not fully aligned, but that’s not a problem with outsourced subrogation. John O’Donnell, Vice President of Operations at AFNI, explains his firm’s compensation is based on a commission basis, thus creating an inherent alignment of interests between both parties. He adds, “Our value proposition ultimately sits on our ability to collect more than our client’s internal process and more than our competition. At the end of the day, that rests on the fact that our people are compensated with incentives to perform better; and they are experts at both insurance subrogation and collections, so they are better aligned around the business process.”
Insurance companies have invested in claims management systems that help them adjust claims and do it quickly with a high degree of customer care. That’s part of their core business. But most have not invested in technology for collection systems nor specialized collections staffing such as subrogation. (Subrogation is an insurer’s legal right to recover the money it is required to pay the insured from the party responsible for the loss.) Collecting on subrogation claims also necessitates working at night and on weekends (when the insured is not working and can be located), but this added expense is a cost not related to an insurance company’s core business.
“They also are not doing a lot of trending and analysis on which subrogation claims are truly collectible and then feeding that back into their front-end process so they can collect a little more,” O’Donnell states.
A study of subrogation insurance professionals, “Outsourcing and Insurance Subrogation,” conducted jointly by the Katie School of Insurance & Financial Services at Illinois State University and AFNI, revealed there is a clear consensus that subrogation practices are and will continue to be of growing importance to insurance carriers because subrogation is one of three areas that are sources of revenue for insurers.
However, internal subrogation insurance claims processes have not been geared to revenue generation. The study also found that business pressures have led to a greater consideration of outsourcing the subrogation process because it requires specialized expertise and appropriate technology to get maximal returns. Without outsourcing, the effort to meet these needs causes an insurance company to add too much to its cost structure.
So why aren’t all insurance companies outsourcing their subrogation claims processing?
To Do or Not to Do Outsourcing
The study’s respondents indicated the following concerns cause their hesitancy toward outsourcing:
- Concerns related to potential “hidden costs” such as the quality of customer service and end-customer satisfaction
- Concerns around privacy of end-customer claims data (medical records, costs, etc.) and security of the insurance company’s intellectual property
O’Donnell agrees that end-customer satisfaction is a key component of the value proposition. “If the carrier’s current process collects only one out of every 10 uninsured motorist claims, for example, it has nine insureds who didn’t get their deductible reimbursed by the collection effort, so they have had a bad experience.”
It’s intuitive that those nine customers are more likely to churn and go to another carrier. “Because AFNI collects more often and higher amounts on the uninsureds, we are making the insurance company’s customers happy, and the retention rate should be higher,” states O’Donnell.
In addition, the study revealed a significant belief among respondents: Most expressed a higher level of comfort toward augmenting the existing subrogation efforts than with outsourcing the entire subrogation operation. They also emphasized their preference for outsourcing only cases requiring specialized expertise. In particular, they expressed a consensus level of comfort with outsourcing uninsured responsible-party auto and home liability cases.
The Katie School study also identified a significant trend. For most insurance companies, outsourcing IT is now a mainstream practice; in fact, one-half of the top 200 US insurance carriers use offshore services in ITO and BPO. But the historical practice of outsourcing to achieve cost reduction has led to sensitivity around the issue of outsourcing and job losses. A number of the larger insurance respondents in the study stated they would not outsource subrogation processes simply to save costs, and that if they engaged in outsourcing it would be for the objective of improving collection/revenue generation results.
O’Donnell points out another component in the value proposition. “The more we are able to get returns on subrogation cases and generate revenue for the insurance carrier, the more competitive a carrier can be. It can even result in keeping rates lower for all insureds.”
Provider Selection Criteria
Respondents stated that they consider subrogation specialists–such as AFNI–to be more knowledgeable and more professional than collection agencies or law firms specializing in subrogation services. They also identified the most important attributes they seek in a subrogation provider, as follows:
- Financial stability
- ROI/results
- Technology
- Regulatory compliance capabilities
- Regular reporting
These are just the entry fee to be at the table; from there, providers must differentiate themselves with other attributes. Some of these include:
- Experience of staff
- Employee turnover
- Capability for case volume fluctuation
- Ability to grow with the insurer
- Geographic capabilities
AFNI’s management folks have 15 years of experience in insurance as claim adjustors and claim professionals. Sixty percent of its collection specialists are from the insurance field and 40 percent are collection professionals. And the firm is SAS 70compliant when it comes to security and privacy.
The Katie School subrogation study concludes that outsourcing subrogation is a recognized strategy for achieving measurable return to the carrier, and that activity will continue to increase. However, respondents also affirm that service providers must differentiate themselves through value proposition and positioning their brand in line with the value the carrier seeks.
Look for providers to get much better at honing and communicating their value proposition. This is especially crucial considering how easy it can be to terminate a contract. Term lengths for outsourced subrogation tends to mirror collections deals–terms of one year (with annual renewals) with a 30-day out provision for the buyer.
As O’Donnell says, “AFNI continues to invest in technology as well as collection tools and expertise to assist in driving more dollars in through the insurance carrier’s door. If we can collect more, the value proposition really begins to widen between what their internal operation collects and what it costs them to run that part of the operation, versus what we can collect and what they pay us in commission fees.” He adds, “We’ve invested in people, technology, and process expertise. When a client calls and asks us to jump, it gives us the capability to jump high.”
These are certainly two very strong prongs to value and ROI through outsourcing.
Lessons from the Outsourcing Journal:
- Subrogation practices are and will continue to be of growing importance to insurance carriers because subrogation is one of three areas that are revenue sources for them. However, internal subrogation insurance claims processes have not been geared to revenue generation.
- Business pressures have led to a greater consideration of outsourcing the subrogation process because it requires specialized expertise and requires appropriate technology to get maximal returns. Without outsourcing, the effort to meet these needs causes an insurance company to add too much to its cost structure.
- Most insurance companies have not invested in technology for collection systems nor specialized collections staffing such as subrogation.
- In outsourced insurance subrogation claims, the value proposition is the outsourcer’s ability to collect more than its client’s internal process. This is best facilitated by compensating the provider’s team with incentives to perform better.