Data Mining for Dollars

Claims is the last area insurance companies would go looking for revenue generation, and subrogation has traditionally not been a focus area for funding. It's not that insurance companies don't want the dollars rightfully owed them by other carriers whose policyholders were at fault, but mining heaps of paid claim files is a dodgy cost/benefit proposition. However, under increased pressure to improve the bottom line, insurers are exploring technologies that can make subrogation a much more profitable exercise.

"Subrogation has risen to the surface as a way of generating cash, and doing so quickly," claims Kay Womble, vice president of sales and marketing, Trumbull Services (Windsor, CT), which provides outsourced subrogation solutions.

Profit Center

When insurers do manage to execute subrogation well, "it is one of the ways an insurance company can actually create its own profit center," according to Michael Costonis, a partner with Chicago-based Accenture. Costonis identifies three critical areas an insurer needs to be good at in order to succeed in subrogation: the ability to identify claims subrogation potential; speed in gearing up the subrogation process; and follow-through in pursuing and managing the case to recovery. In getting the process started, "the challenge is to identify at point of transaction-not retroactively," Costonis asserts. "That means, as the claim is being handled, having technology support that's smart enough to flag that claim for high subrogation possibility."

While some subrogation functionality has traditionally been built into risk management, policy admin and claims systems, it has typically been extremely limited, according to Mark Bates, senior vice president and CIO, Trover Solutions (Louisville), a provider of subrogation software and services. "The policy administration and risk management systems out there today do not, as part of their normal process, identify the possibility of subrogation," Bates says. As a result, companies have to spend an inordinate amount of resources to find subrogation opportunities.

"Subrogation is to some extent a zero-sum game-companies that do it well do so at the expense of those that don't," Bates observes. "It's become a lot more competitive out there, and as a result, people are looking for solutions."

Fireman's Fund Insurance Co. (FFIC, Novato, CA, $11.5 billion in assets) has worked to develop its own solution for the identification of subrogation opportunities. Building on investments in data warehousing, analytics and data mining technology beginning in 1998, FFIC is taking "a very aggressive information-centric approach to improving performance management in all areas of the company," says Martin Ellingsworth, director, operations research group, FFIC. "Subrogation is on our targeted list of cash-flow opportunities to find cases that we may be missing, as well as to find them quicker so that we can accelerate the net present value of that cash by collecting it more quickly."

Ellingsworth describes FFIC as a likely leader among peers in developing algorithms and data-mining technologies to help in reviewing the hundreds of thousands of files necessary to find the mere thousands of files with subrogation potential. "With enough engineering you can find the patterns in unstructured data that have very high importance for pointing out an issue like subrogation," he says. "Being able to pick a thousand out of 400,000 closed cases is the art that pattern recognition is helping with."

FFIC began algorithmic development in the spring of last year, created initial models and did a test-and-learn pilot in the summer. "We then created the first major list that we sent for review, out of 8,000 suffix lines," Ellingsworth explains, referring to the possibly multiple attributes of a single claim.

That list represents the potential to recover nearly $38 million, from among personal auto and workers' comp claims, says Ellingsworth. He acknowledges that while the carrier is successfully identifying promising files, it takes time to execute the process and book the collections. "I can't tell you how successful this program will ultimately be, but right now we're pursuing $5 million actively, and we've collected $1 million to date"-within a period of only eight months, he notes.

Vendor Value

Trumbull's Womble asserts that insurers that typically have not invested in subrogation technology are turning to vendors that provide software via an ASP model. Increasingly prevalent is for carriers to look to a business process outsourcing model. "A combination of business and technology caused a new business model to evolve, allowing carriers to increase their initial results and get some lift on their recoveries," she claims. (See related article on this page.)

Whatever its success in identifying subrogation potential, FFIC also looks to vendors for the execution part of subrogation. "That's where you see the most vendor strength, in extension from collection agencies teaming up with subrogation outsourcing groups, whether it's Craig IS"-the firm FFIC does business with-"Trumbull, Trover Solutions or some of the smaller, emerging companies that are coming into the space," Ellingsworth says. By seeking "business-process outsourcing to a vendor who can concentrate on the IT investment to perfect the process management, you can really gain value by wringing out expenses."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio