SUBROGATION | FEATURE

19June 2015

captivereview.com

Generating revenue for a cap-

tive insurance company has

traditionally taken place in

two forms: premium and

investment income.

Premiums of course are earned in the

anticipation that a much larger sum will

eventually be sent back the other way,

while investment income can be risky,

undesirable or negligible.

There is a way, however, to recover

a meaningful proportion of those paid

claims by proving third party liability

at the original loss event. In such cases that

is money rightfully owed to the captive.

Subrogation, in short, is when the

rights of the insured are transferred to

the insurer after a claim has been paid.

For the past 20 years the large national

and global insurance carriers have been

investing and building up their subro-

gation departments – State Farm’s sub-

rogation unit is said to total around 800

employees and recovers $1.5bn a year in

paid claims.

So are captives following suit? The

answer is slowly, but very few.

“I find that the self-insureds and the

captives are trailing way behind what the

carriers have done and where this area

has gone over the years,” Jeffrey Baill,

partner at Yost & Baill in the United States

and founder of the National Association

of Subrogation Professionals (NASP), tells

Captive Review.

This lag can in part be put down to

significantly smaller risk management

and claims handling departments com-

pared to the large insurance companies

or under-investment in the captives

themselves.

In essence, insurance is not the pri-

mary or even secondary business func-

tion of a large manufacturing, retail or

energy firm.

“Very few self-insureds have a ded-

icated subrogation person so they are

more following a model which is 20 or 30

years old,” Baill adds. “As a result of that

they are not identifying the opportuni-

Written byRichard Cutcher

THE MISSING MILLIONS?Commercial insurance companies have invested signifi cant time and money into recovering paid

claims to third parties, so is it time captives followed suit?

019_020_CR140_CoverFeature.indd 19 15/05/2015 10:51

FEATURE | SUBROGATION

20June 2015

captivereview.com

ties as well, they are not pursuing them

as effectively.”

Data collectionThe answer for the majority of captive

owners, however, is unlikely to be hiring

an internal subrogation specialist.

In the United States and the United

Kingdom the ability to hire “no win no

fee” lawyers to carry out the necessary

investigations and legal work ensures a

cost efficient approach can be utilised.

Some countries in Europe do not per-

mit such services and makes this route

more difficult.

The key to establishing an effective

and efficient subrogation programme,

whether managed in-house or out-

sourced, is putting in place strat-

egies to collect key data when the

original claim is made.

“Captives are missing a trick

because if the policyholder has a

good scheme to capture the details

of the losses it suffers there are

plenty of specialists who are willing

to do no win no fee work,” Cathe-

rine Hawkins, an insurance recov-

ery specialist and partner at law

firm BLM in the UK, tells Captive

Review.

“This works for large claims, but

also smaller and more frequent losses too.

If the policyholder, for example, owns car

parks and drivers regularly hit the barriers

and damage them, then you could organ-

ise a system to record number plate infor-

mation and pursue recoveries.”

It is important to note the very nature

of subrogation in no way effects the speed

at which a claims payment is received by

the insured.

The rights of the insured to seek third

party compensation only transfers to

the insurer once the claim has been paid

in full.

“In the captive case the parent com-

pany is going to want to get whatever has

been damaged back on the road or back

in business as soon as possible,” says Greg

Zarin, president of North American Sub-

rogation.

“If somebody else is perceived to be

at fault and there is a dispute over third

party liability then that can take time.

Rather than tie up the business in going

after a third party, you can pay the claim

and address the issue by outsourcing the

subrogation efforts as a contingency fee.”

In theory, this should create a win-win

situation for the parent and ultimately

the captive.

Transcending the captiveLes Boughner, a captive management

veteran of more than 20 years formerly of

Willis and AIG in North America, agrees

with the subrogation advocates that cap-

tives are missing a trick and it is a tactic

rarely, if ever, discussed by the managers

with the parent company.

He says he only sees captives involved

in subrogation when participating in a

large insurance programme alongside a

commercial carrier.

“It transcends captives,” Boughner tells

Captive Review. “There is always a lot of

money to be made through aggressive

subrogation so any time a captive sup-

ports an insurance programme that is

being subrogated there is benefits for the

captive. Have I seen it a lot? No.

“It is generally a very large loss and a

loss that involves an insurance recovery

for the carrier as well.”

Boughner says he has never witnessed

an example of a captive subrogating a

pure loss, but adds there is no reason why

that should not happen.

“If you have got a $500,000 or $250,000

loss that somebody feels could be subro-

gated and works for 10% there is no rea-

son you shouldn’t pursue it. But I would

say typically it is not pursued.”

The question can be posed then that

if the large carriers typically fronting

captives are engaged in “aggressive sub-

rogation”, how much of any recovery is

making its way back to the captive and

replenishing its balance sheet?

It seems in some cases very little, since

the carrier underwriting the largest slice

of the cover will be prioritised when

recoveries are dished out.

Hawkins cites the example of a captive

writing the first £1m of a policy and the

insurer writing a £10m layer on top of

that.

If subrogation takes place and £8m is

recovered then in the majority of cases all

of that would go to the carrier rather than

the captive.

“It will be indirectly good for the cap-

tive because the carriers will be pleased

they have got their money back and con-

tinue viewing the client as a good risk to

take on,” she says.

This approach could go some way to

explain why the large fronting compa-

nies do not make subrogation a key ser-

vice differentiator when pitching to cli-

ents – in effect, engaging in subrogation

only when it impacts their bottom

line.

Just as he believes captives are

missing a trick by not exploring

subrogation, Baill thinks the front-

ing companies are ideally placed

to address the client oversight and

expertise gap.

“If I was one of those fronting

companies that would be one of my

sales pitches for how I could add a

value added service,” he says.

Subrogation potentialIt is difficult to quantify the amount of

money captives could be missing out on

by not utilising subrogation methods.

A clue, however, could lie in annual

benchmarking data collected by the

NASP from its members. In 2013, the

industry was recovering 4.22% in paid

commercial property claims and in 2012

commercial auto lines it was around

12.8%. Workers’ compensation sits at

1.58% of paid claims.

“We also benchmark high performers

and low performers and in auto there is a

difference of almost 10%,” Baill adds.

“The low performance was around

12% and the high performance was in the

20% range. What that told us was how

companies were organised and how they

operate really matters in terms of their

success rate.”

Engaging in subrogation may not suit

all captive owners, but as budgets are

squeezed and parents seek greater justi-

fication for maintaining a captive those

missing millions could be the final piece

in the jigsaw.

“If the policyholder has a good scheme to capture

the details of losses there are specialists willing to do

no win no fee work”Catherine Hawkins

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