What is the purpose of subrogation in insurance?

Subrogation is a crucial process in insurance that allows an insurer to recover funds from a third party after it has paid a claim to an insured party. When an insurance company compensates its insured for a loss, it assumes the right to pursue any responsible third parties for reimbursement. This means that if someone else was at fault for the loss that caused the claim, the insurer can take legal action against that party to recover the amounts it paid out.

This practice benefits the insurance company by minimizing its losses and helps keep premiums lower for policyholders. By recovering funds from third parties, insurers can maintain a healthier financial position and be better equipped to pay future claims.

In contrast, the other options describe different insurance concepts that do not pertain directly to subrogation. The first option addresses risk transfer, which occurs when the insured pays premiums to the insurer in exchange for coverage, but does not involve the recovery of costs after a claim has been paid. The option regarding evaluating claims focuses on assessing the validity of claims rather than recovering funds. Lastly, arranging compensation for service providers pertains to payment mechanisms in healthcare rather than the process inherent to subrogation.