What does the concept of "subrogation" mean in insurance?

Subrogation is a key concept in the insurance field, referring specifically to the insurer's right to step into the shoes of the insured after a claim has been paid. When an insurance company compensates a policyholder for a covered loss, subrogation allows the insurer to recover that amount from any third party responsible for the loss. This process not only helps insurers minimize their losses but also ensures that the insured is not compensated twice for the same incident—once by the insurer and potentially again by the responsible party.

Through subrogation, the insurer has the opportunity to seek recovery through legal action or negotiations with a third party. This mechanism is essential for maintaining the financial health of insurance companies, as it helps keep premiums lower for all policyholders by offsetting the costs of claims.

In contrast, the other choices focus on different aspects of insurance that do not relate to subrogation. Collecting premiums pertains to the revenue process of the insurer, calculating policy premiums involves assessing risk and determining rates, and strategy for reducing claims payments centers on loss control or claims management rather than the recovery of funds through subrogation. Each of these options represents important components of insurance practices, but they do not define the subrogation process itself.