Estimation Errors Among Insurers: The Case of Subrogation

Subrogation is the right to pursue responsible third parties to recover amounts paid out to settle claims. Subrogation recoveries can be substantial and represent an estimate potentially subject to management bias. This study investigates factors associated with subrogation estimation errors. In a sample of generally understated subrogation estimates, we find that lower (weaker) financial strength ratings are positively related to more optimistic subrogation estimates. We also find that publicly owned firms, on average, report higher subrogation estimation errors. This effect is less pronounced among public insurers with weak ratings. Overall, our results suggest that subrogation estimates are more optimistic when firms struggle financially or are publicly owned.