Salvage and Subrogation in Claims Reserving

Salvage and Subrogation Basics

Salvage refers to the value recovered from damaged property (such as selling a totaled vehicle), while subrogation is the right to recover claim payments from a responsible third party. Both reduce the net cost of claims. In actuarial reserving, these recoveries must be carefully modeled because they follow different development patterns than gross losses. Recoveries often lag initial claim payments by months or years.

Reserving Considerations

Actuaries can reserve on a gross basis and separately estimate anticipated recoveries, or work with net-of-recovery data directly. The gross approach provides more transparency but requires additional assumptions about recovery rates and timing. Key challenges include estimating the collectibility of subrogation receivables, accounting for legal costs associated with recovery efforts, and handling changes in recovery patterns over time. Regulatory and accounting standards may prescribe specific treatment of these amounts.