Benchmarking & Metrics: The devil is in the details

January 31, 2011 at 9:36 am Leave a comment

It is often said that the devil is in the details and perhaps nowhere is this truer than the insurance claims process where benchmarking and metrics define both quality and results.   This is particularly evident in the subrogation arena; where upwards of 15% of all claims are closed with a missed subrogation opportunity at an annual cost of $15 billion dollars. 

In my experience overseeing a large organizational claims and subrogation processes, this actually strikes me as low, as it may not fully encompass cases where the adjuster settlement was based upon total liability as opposed to properly identifying comparative negligence. 

When considering benchmarks, there are time bound and results oriented metrics which all have an impact on an organizational bottom line.  The most commonly used benchmark, which dates back to the original Ward studies in the 1990’s measures Total Dollars of Net Subrogation Recoveries as a % of Total Indemnity Paid Losses for Personal Auto Collision.  This is probably the most common benchmark but is only as accurate as subrogation identification, which often lacks within carriers resulting in collectible files being closed with no recovery.   After the original study, it was concluded that high performing carriers collect about 23.7% while the total universe is at 11.6%.

In the years since, there has been some focus by carriers on improving their subrogation process which has led to an increase in recovered dollars.   According to a recent NASP benchmarking study, net recoveries to total paid collision is 27% for standard carriers and 14.5% for non standard carriers. 

A potential flaw with the current benchmarking methodology is its heavy reliance on collisions.  While 72% of recoveries are indeed related to collision, it is shortsighted to not give consideration to all line coverage’s where subrogation is a viable option, in particular UM, UIM, UMPD, PIP and Medical Payment’s.   In addition, there are even more overlooked opportunities for health, worker’s compensation and property insurance. 

Some key metrics that can be considered by carriers include the following:

  • Recognition percentage – dollars identified as recoverable from paid dollars by claims adjusters.  The key here is having a pool of adjusters who understand the concept of subrogation, local jurisdictional knowledge and having the ability to negotiate shared liability settlements.  In industry benchmarking studies, subrogation recognition generally ranges from a high of 45 files to a low of 5 for every 100 new claims.   Specific to my experience, the optimal collision referral rate, while dependent upon negligence laws, should be around 35% in a pure comparative state, 25% in a modified comparative state and 15% in a contributory state.

 

  • Recovery Rate – dollars actually recovered from total paid dollars.  Measure this in terms of both gross recovery as well as costs after factoring in expenses.  When factoring comparative negligence and improper referrals, the recovery rate should be somewhere in the range of 85-90%.   This requires adjusters properly identifying subrogation, assessing comparative negligence and pursuing only what they are entitled to.  

 

  • Recovery Rate per FTE. Include in this both the gross dollars as well as net dollars and expenses incurred.  There is a wide variance among adjusters, but a good target would be $1,000,000 per subrogation adjuster.  

 

  • Cycle Time- time from subrogation identification to recovery.   The industry average is about 200 days, yet the average time to issue final payment is about 10 days.   With the ability to fast track arbitrations and leverage technology, this could be compressed to well less than 100 days.   Each day that the money sits on the table there is a quantifiable impact to the actuarial triangles.  

 

  • Subrogation Allocated Loss Expenses (ALE) – file related expense dollars paid to recover subrogation dollars.  It makes no sense to spend $500 dollars in overhead to recover $400.  The following model exemplifies when it may make more financial sense to outsource more complex portions of recovery operations. 

  

  • Subrogation Unallocated Expenses – non-file related expense dollars paid to recover subrogation.

 

  • Recovery Multiple – ratio of recovery dollars to expense dollars

 

  • Files closed with no Recovery-Percentage of files referred to subrogation that are closed with no recovery.   While there can be legitimate reasons, carriers invariably tend to close files prematurely particularly in cases involving uninsured tortfeasors who tend to be a challenge for carrier subrogation adjusters. 

Some benchmarks that carriers could utilize to most effectively gauge their subrogation performance could also include a formula that divides total staff into total recoveries for a recovery amount per FTE.   This should be used in conjunction with disposition numbers such as total closures and cases closed with no recovery.  

When looking at the percentage of files closed with no recovery, it is critical to understand the carrier’s workflow.  Many carriers use internal adjusters, often with little debt collection experience, to pursue uninsured tortfeasors.   A good barometer of how much money is being left on the table is the frequency by which second, third or even fourth looks are sent out to the open market where a vendor will review it, often at no charge.    

While not an insurer, AT&T uses one of the most robust and effective collection strategies available.  They don’t rely on one vendor, but rather upwards of 27 vendors, that are used for secondary, tertiary and quaternary reviews.  They post all results daily, creating a climate of competition.   What carriers need to realize is that on a third review, they may recoup another 1-3%, while a quaternary review may yield an additional percentage point on top of that which is critical in a market with tight margins.  At the end of the day, what remains uncollected is sold on the open market. 

One key aspect that is not often considered in subrogation benchmarking is that of claims.   To truly understand the end to end process, the following metrics can be very beneficial in identifying opportunities to maximize recoveries. 

  • Percentage of files referred to subrogation by line coverage. 

 

  • Percentage of files where collision was paid but no PD was paid with no associated referral to subrogation.

 

  • Percentage of claims where liability was assessed at either 0% or 100% or similar moniker in claims system such as insured not at fault/insured at fault. 

 

  • Referral of supplementals and rental invoices to subrogation.

Many carriers will look at just a fraction of the available metrics, often focusing on those that are easily obtainable, such as bottom line recoveries or percentage of collision referrals.   This approach can have unintended consequences, such as adjusters referring to meet a number rather than doing their investigation.   The challenge with any metric is to ensure that there is quality control in place, as policing adjusters is often required to make sure that they are doing the right thing.   

Christopher Tidball is a claims and subrogation consultant and the author of Re-Adjusted: 20 Essential Rules To Take Your Claims Organization From Ordinary to Extraordinary.   His career in claims spans two decades as a Claims Adjuster, Manager, Quality Assurance Director and Claims Process Leader.   For more information, please visist www.christidball.com or email chris@christidball.com

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Chris Tidball is a claims and revenue management consultant and author of the "20 Essential Rules" series of self and organizational improvement books. You can ask him a question at chris@christidball.com

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