Why does netting of subrogation payments continue to be seen as a problem that needs to be solved when costs have plunged?
Netting of subrogation payments, the exchanging of payments between carriers at regular intervals instead of on a claim-by-claim basis, is a concept that has been around since the mid-1990s. It is once again back in the news with the announcement that State Farm is developing its own blockchain solution to net subrogation payments between itself and another unnamed carrier. Some say this is an innovative solution for the use of blockchain for the insurance vertical, but is it really nothing more than a hammer (blockchain) looking for an old nail (payment netting)?
All will agree there is room for vast improvement in reducing friction of the subrogation workflow, including the exchanging of funds. Carriers send thousands of checks to each other on a monthly basis in the settlement of subrogation claims – the same process that has occurred since the beginning of time relative to the subrogation process. It’s expensive, involving the printing of checks, mailing costs and the labor to apply funds by the receiving company. Each payment needs to be broken down and applied in the claims system to the individual lines of coverage for the original claim payment and then balanced out in the accounting platform. In a "netting" scenario, the total value of what two companies owe each other is issued by one payment, but then still has to be reconciled on both an outbound and inbound basis, making sure to reconcile every claim that is affected. Remember, each side of the payment has premium ramifications. Many touchpoints, applications and processing.
No wonder this has been an issue, but why does it still garner so much focus, with the advancement of financial technology and the reduction of check processing fees? Shouldn’t we now be focusing on a more holistic solution for the industry affecting more than just the payment?
In the mid-1990s, banking costs drove the netting conversation as a way to reduce fees, but the industry wasn’t able to come together on how to solve the problem. Competitive pressures, internal constraints and the problem of how to reconcile the carriers' multiple platforms contributed to the futility of the conversation. Industry organizations even tried to solve the problem but with no success.
9/11 changed forever how the banking industry dealt with checks. The country was brought to a standstill for three days due to air traffic being halted (remember, checks were physically moved between the Federal Reserve branches on a daily basis via planes at that point). One of the outcomes of this national tragedy was the implementation of the Check 21 Act in 2004, allowing the image of the check to have the same "value" as the original check. Financial technology, better known as fintech, was developed to place the imaging process of the check into the hands of the business customer, allowing it to image the payment and send it to the bank. The banking industry gave the insurance carrier a digital scanner so the carrier could do the teller’s job of scanning the payment instead of the bank incurring that cost, but the insurance industry still had to manage the application of funds manually as it did before.
Great move for the banks and yet carriers couldn’t figure out their now 10-year problem of netting even though technology existed to take that scanned copy of the payment and automatically apply it to the claim file via new insurance technology. No changes were required to claim platforms of the paying carrier or how the receiving company had to apply the funds – just a straight automation opportunity with a substantial labor savings. However, the major carriers still pursued the netting solution even though the problems they were originally trying to solve were no longer an issue.
See also: Blockchain: Seizing the Opportunities
We are now 15 years removed from the introduction of fintech by the banking industry, and the netting conversation remains! Banks allow their business customers to image and deposit their checks through a scanner. Consumers manage their accounts through their mobile devices along with the ability to transfer money to each other through apps such as Venmo or Paypal. Moving money has become extremely inexpensive, with the result for all of us being the reduction in the processing fees. Then why does netting continue to be promoted as a problem that needs to be solved when the costs have dramatically decreased? One does have to wonder.
The industry is working through various use-cases for blockchain, and, yes, you guessed it, the financial transaction of the netting of payments is still being pursued. The original problem of check processing costs is no longer an issue, while the same issues of allocating the information to both claim files remains. Participation remains problematic, but the level of concern increases if a blockchain is being managed by one of your competitors. Who has access to the data? Where is it stored? How can it be used? Does a netting solution created and managed by a carrier create a competitive advantage for that carrier?
If we can get beyond these questions, the bigger issue remains as to why time, money and effort are being used to address a 20-plus-year-old issue that can be handled via existing technologies rather than complicating the process with the additional friction of netting being added to the industry’s expense? Maybe the alternative is to use blockchain to digitally transform the subrogation workflow affecting LAE in dollars rather than cents while also maximizing recoveries.
Our industry will continue to evolve and build on new technologies. Let’s be sure to swing our hammers at nails supporting the future building blocks rather than those 20-year-old rusted out nails.