A wrecked car sells for scrap, a negligent driver's insurer cuts you a check, and your reinsurer absorbs the top of a large claim. Each of these is money flowing back in, and a net unpaid analysis has to project all three.
Salvage is what you collect by disposing of property you paid for in full. Total a car, pay the insured, take the title, then sell the wreck for scrap. That scrap money is salvage.
Subrogation is recovery from a third party legally responsible for the loss. You pay your insured, then step into their shoes and pursue the at-fault party. Property and auto physical damage generate the most subrogation.
Reinsurance recovery is loss ceded to a reinsurer under a treaty. The gross claim is yours to pay first; the reinsurer reimburses the ceded portion.
KEY: All three recoveries lower the insurer's net cost. Net claims equal gross claims minus salvage, minus subrogation, minus reinsurance recoveries.
Fix the vocabulary before the math. Gross claims include everything before recoveries. Ceded claims are the reinsurer's share. Net claims are what the primary insurer retains: gross minus ceded.
Common mistakes
- Reading the raw immature ratio as final. S&S lags payments, so the ratio at an immature age understates ultimate. Develop the ratio triangle to ultimate and judgmentally select the immature year; a 0.462 projected ratio might be selected at 0.480.
- Applying the selected S&S ratio to net or paid claims. The ratio method multiplies the selected ratio by ultimate claims gross of S&S, not by paid or net claims.
- Adding recoveries to gross claims instead of subtracting. Recoveries reduce cost. Net unpaid is gross unpaid minus unpaid recoveries, never plus.
Bottom line
- Salvage is money recovered by selling damaged property the insurer takes title to; subrogation is money recovered from a responsible third party; reinsurance recovery is loss ceded to a reinsurer.
- All three are recoveries that reduce gross claims to net claims; net unpaid equals gross unpaid minus unpaid recoveries.
- Two overall approaches: analyze claims net of recoveries directly, or analyze gross and estimate recoveries separately.
- Estimate ultimate recoveries by developing a triangle of recoveries received, or by developing a triangle of the ratio of received S&S to paid claims, judgmentally selecting the immature year, then applying that ratio to ultimate claims gross of S&S.
Exam shortcut
Treat salvage and subrogation as one combined S&S item and estimate it with the same development or ratio methods you use for losses, then subtract the received amount to get the unpaid piece. For the ratio method, develop the received-S&S-to-paid-claims ratio triangle, select the immature year by judgment, and apply the selected ratio to ultimate claims gross of S&S. For reinsurance, read the treaty type first.
The full lesson (about 2,734 words, 18 min read) adds 4 worked examples, all 8 common mistakes, a self-check, free in the app.
Learning objectives
- B13
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