Size:

TPA’s come in all shapes and sizes.  Some large national companies have multiple locations and hundreds of employees.  There are small family owned TPA’s with a staff of only a couple people.  This can be a very significant factor in the decision making process when selecting a TPA.  Yes, size does matter.

A small TPA with two or three adjusters might be the perfect fit for a Program Manager writing a small book of physical damage business which generates only a handful of claims each month.  Each claim will probably get close attention, and more than likely there will be consistency, with each claim being handled by the same several people.  That same TPA would probably not be a good fit at all for an insurer writing a large multistate personal auto program, for example, which generates a huge volume of relatively low severity claims.  The small TPA simply may not have the resources required to do a good job.

Some insurance or self-insured organizations have acknowledged that it can be preferable to work with a smaller TPA for the simple reason that they may have better access to its top management, who will probably tend to be more open to addressing any concerns or changes.

On the other hand, a large TPA might be ideal in some situations.  Some of the older, well established TPA firms are particularly geared toward handling high volume claim programs, and this is especially true for Workers Compensation claims.

There can be problems when the TPA’s adjusters are handling claims for a variety of different programs.  Will they be as consistent in following the specific guidelines for each?  Will a particular program, specifically a smaller one, tend to get “lost in the shuffle” with a large TPA?

Ownership:

Another factor to consider is the ownership of the TPA.  Some insurers, brokers, general agents, and others, both large and small, have developed what amount to in-house TPA’s to handle claims, including those generated by their own parent company’s programs as well as those from “outside” clients.  This might be a good fit for some, but not necessarily a great idea for others.  A company may have legitimate concerns about contracting with a claims firm owned by a competitor, for example.

It can be very important to determine whether a TPA being considered is owned by or affiliated with another insurer or reinsurer, etc.  The level of corporate support for the TPA operation can ebb and flow with overall company profitability; there have been instances in the past when the parent company has pressured its claims operation to increase revenue and decrease expenses, which can have a detrimental effect on the level of service.

Some large independent adjusting firms have also formed or acquired TPA divisions.  While this may be a logical extension of the company’s claim business, in certain cases the primary goal might be to generate claims for their various local “adjusting” offices to handle, without regard to whether those offices always have the appropriate expertise needed for a particular type of claim.  When considering a prospective TPA it can be important to identify whether the TPA operation is designed, in whole or in part, to be a “feeder program” to provide claims assignments for the adjusting company’s local offices, and a source of business and revenue for its core business operations.

Background:

The background and origins of the TPA can also be important factors to consider.  Workers’ Compensation and medical disability claims for many years constituted the bulk of outsourced claims, and a number of large and very successful firms have been built to handle those claims.  Some of these firms, in looking to expand their opportunities, have also taken on other types of claims, with sometimes mixed results.  A claim administration firm designed and built to handle a large volume of a particular type of claim may not always make the transition to other types of claims smoothly.

The background of the TPA’s claims staff can also be a factor which is often overlooked.  A TPA whose staff consists exclusively or primarily of people with a background in independent adjusting may take a somewhat different approach to claims than one whose staff came from an insurance company.  As a very general rule, the “company people” tend to have worked with and be more familiar with policy elements and coverage issues, while the independent adjusting people more frequently have an outside claim investigation background.

Specialization:

The types of claims in which a particular TPA specializes can obviously be an important factor.  It is critical to examine whether the TPA has the staff and experience for the type, complexity, and volume of claims under consideration, and to match the program with the appropriate expertise.

A firm whose background lies exclusively in handling personal auto claims may not be a great match when it comes to handling a program of commercial general liability claims.  By the same token, a TPA which does an excellent job handling transportation claims may not be quite as successful taking over a program of construction defect or medical malpractice claims.  Some TPA’s have specific areas of specialization, such as Workers Compensation claims, Commercial Property claims, Personal Auto claims, or Transportation claims.  Be wary of someone who claims to be an expert in everything.

A TPA specializing in a particular type of claim will generally have developed a certain expertise.   In addition to the specific knowledge and abilities in that particular area, there may also be other related advantages.  For example, a TPA with a strong background in handling W.C. claims will likely have strengths and available resources in areas such medical bill review processes or individual medical case management.  A TPA which focuses on handling truck or heavy equipment physical damage claims will likely have a network of local appraisers and experts to call upon in the handing of those claims, while a TPA new to that line of business will probably face a learning curve to some extent.

There are examples in the industry of a claims organization with a focus on handling personal auto losses trying to make the leap to long haul trucking risks, and approaching liability and physical damage claims involving large over the road tractor-trailers as if they were nothing more than “big cars”.  This has sometimes revealed a poor understanding of some of the unique issues involved, and poor results.

The same factors can apply to litigation management.  A Workers Compensation or Health Benefits TPA will probably have identified and established relationships with attorneys who specialize in dealing with those types of claims.  But that same TPA could very well run into issues when it has to find an attorney to deal with a Motor Truck Cargo claim, or a coverage issue involving a completely different type of exposure.

Infrastructure:

It is important to look at how a TPA operates.  Does in make appropriate investments in areas such as ongoing education and training of its staff?  Has it spent the necessary time and expenses for licensing of its claim handling staff in various states?  These costs can be considerable, and potentially an area where a TPA can cut corners.

Another important issue involves staffing.  Has the TPA experienced a high rate of claim staff turnover?  How will it “staff up” for a large new program?  Are the experience levels of the claim handlers appropriate?  Is there clear evidence of good hands-on supervision?

One important element to consider is the adjusters’ caseloads.  Many industry experts suggest that an adjuster can reasonably handle a caseload of 100 to 150 claims.  This statistic can obviously be affected by the type of claims involved, the extent of the adjuster’s involvement, and how they are counted.  Nevertheless, an adjuster handling 200 claims or more will often not have the time to devote the attention needed, and may be spread too thin.  Fewer claims on an adjuster’s plate mean more time and attention paid to each one, and this can typically result in more hands-on handling, more timely settlements, and quicker turnaround of claims.

Another key element in some situations can be the “back room” resources of a particular TPA.  Does it have the data systems and support, accounting, claim fund management, and other services required?  Can it provide the specific claim data elements and report formats needed by the client?  Is the management, front line supervision, and staffing stable?  Are the adjusters properly licensed?  Is there appropriate emphasis on recovery of salvage and subrogation?

A fairly recent trend has been for some TPA’s to abandon their “brick and mortar” offices, and have employees work from their homes.  While there may be cost benefits, this  approach can have its own set of potential issues, depending on the type of claims involved, the structure and supervision in place, etc.

Price:

Pricing models for providing claim administration can vary widely, from a “flat fee” per claim, to an hourly time and expense rate, to a “cost plus” basis, to a percentage of premium, and others.  Regardless of how the price is determined, in too many cases a company considering outsourcing of claims may select a TPA largely, or wholly, on the basis of price.  A large TPA organization may have considerably greater overhead, with correspondingly higher prices, but may also potentially have more resources to bring to the table.

One common pitfall involves a quoted hourly fee for claim services.  One firm may charge less per hour, but simply inflate the number of hours billed for a particular task.  The quoted hourly rate may not include some common overhead items such as telephone costs, copies, postage, etc., and these “hidden” costs can inflate the actual rate.

In addition to comparing fees alone, it can be important to consider whether the TPA can save additional money through claim handling efficiencies, through such key processes as litigation management and recovery of salvage or subrogation.

Intangibles:

A couple other issues to be considered include such intangibles as reputation and references.  What programs has the TPA handled previously, and what type of claims were involved?  Did they do a good job, and were the clients happy with the level of service?  Did the TPA live up to its agreements?  Were regular claim audits conducted, and what were the findings?  It can be important to look closely at prior clients and outcomes.

Can the TPA provide the level of customization and flexibility a client is looking for?  And more importantly, is it willing to do so?  It might be willing to change its standard procedures for a large program, but may not for a smaller less profitable one.

Although the term is grossly overused, it can be very important for an insurance organization to form a true partnership with a TPA it selects to handle its claims.

Conclusions:

The claim TPA concept has been described, only half jokingly, as “Rent-A-Claim Department”, and there is some truth to that.  An insurer, Program Manager, MGA, reinsurer, or self-insured company clearly takes some risk when selecting an outside firm to take on the task of handling its claims.  This can include managing its loss reserves, issuing claim payments, and interacting directly with its customers.  A poor decision can have significant and long term effects.

My own background has provided a somewhat unique opportunity to see these issues from the perspective of both the insurer and the TPA.  I spent a number of years managing a Claim Department for an insurer which eventually started writing some Program business in addition to its traditional lines of business.  This put me in a position to evaluate and select TPA’s for the handling of a particular program in several instances.  I found, not surprisingly, that some TPA’s can be long on promises, and sometimes woefully short on delivery.  I learned fairly quickly that it is important to monitor a TPA’s work by reviewing and auditing individual claim files on an ongoing basis.

Outsourcing certain tasks has been commonplace for many years in some industries. Cities and municipalities may contract for certain services requiring specific skills or expertise such as community planning or traffic engineering. Businesses such as hospitals learned that outsourcing work such as maintenance and food services can create efficiencies and save them money. States and other governmental entities have contracted to outside firms the running of their prisons and even schools. Many companies routinely hire outside experts to take care of their legal, accounting, data systems, and other processes that can require particular specialized skills.

The insurance industry, which tends to be somewhat conservative by nature, was for much of its history behind this curve to some extent. Some claim processing and claim handling functions, particularly in very specialized and highly systems driven areas such as Employee Benefits or Workers’ Compensation, have been contracted out to third party specialists for many years. Most insurers, however, traditionally tended to keep the handling of other types of claims, particularly standard property and casualty claims, “in-house” to be handled directly by their own employees. In recent decades this has begun to change.

Why Outsource Claims?:


There are various reasons why an insurer would decide to entrust something as important as the handling of its claims to someone outside its company. The most obvious reason of these have to do with the potential economic benefits.

Claim related expenses represent a huge cost to any insurer. By one estimate, as much as 80% of a typical insurer’s earnings are consumed through claims and claim related expenses, and clearly represent the most significant cash outflow for an insurance organization. Even a small improvement in efficiency or a modest decrease in claim costs can obviously contribute significantly to an insurer’s bottom line.

Various ideas for reducing claim expenses have been considered. For example, insurance organizations have been able to realize some legitimate savings by implementing more automated systems. These benefits, however, have been somewhat limited when it comes to claims. Handling claims remains a hands-on process, one which has been described as “less automated and more highly skilled” than others such as policy issuance or data collection.

However, various industry studies have identified the outsourcing of claims as one of the areas which offers the greatest potential to reduce costs for insurers. One estimate projects the potential savings to an insurer by doing so as high as 15% of overall claim costs, and while specific details will obviously vary from one situation to another, more insurers have begun to focus on savings in the area of claims in looking for ways to improve their bottom lines.

A big part of the overall cost of claims to an insurer comes from maintaining a clam staff. One industry study concluded that over 40% of the time spent by insurance company employees on claims handling is associated with routine overhead functions which have little impact on the actual outcome of those claims. Many insurers have come to the realization that outsourcing claims can significantly affect the need to recruit, hire, and train their own claim staff. Those fixed internal salary and benefit expenses can then be converted to external service fees. Those fees, which are typically based on transaction volume, then will rise and fall with the flow of business. The insurer can also smooth out cash flows by avoiding periodic capital expenditures for in-house processes and systems related to claims.

In some cases the decision might be based on a particularly specialized knowledge base or skill set that is not readily available among its own staff. For example, an insurer may issue policies covering Fine Arts such as rare and expensive paintings, and outsource the handling of the resulting claims to a firm which has the required expertise to investigate and analyze those claims. In some instances, it can be simply a matter of overall staffing. An insurer may not have, or may not want to spend the resources to have, a full claims staff to handle a surge in claims, and may refer the “overflow” to an outside source.

As a growing number of insurers have recognized, outsourcing such operations as claims can also allow them to focus on their true core competencies such as writing new business, underwriting policies, and developing new product lines. In short, they can concentrate on growing their business and lowering overall costs rather than on day to day operations such as claim handling. As mergers and acquisitions by and between insurers have become more widespread, outsourcing can also minimize administrative costs for involvement in multiple claim programs. Another unexpected benefit realized by a number of insurers is that outsourcing claim functions has allowed them to recognize previously hidden overhead costs which now become visible and can be better managed.

Outsourcing can also provide a great “exit strategy” for an insurer. Rather than spend considerable money for staffing and offices for a particular program that may go away in a few years, it can be economically much more feasible to refer that program’s claims to a third party. When the insurer does decide to discontinue writing a particular program or line of business and focus its efforts and resources elsewhere, the existing claims, or those claims that may still arise, from this “run-off” program will have to be handled until they are concluded. It must maintain an infrastructure to service those claims, which might take as long as 5 to 10 years after the last policy was written, depending on the type of coverages and claims involved. And insurer claim staff costs can increase in run-off situations because of low morale and extra incentives required to retain staff members with reduced long term future prospects. In these circumstances, insurers and reinsurers have increasingly begun to contract with an outside TPA to handle the remaining claims. In addition to the cost savings involved by doing so, the insurance organizations can enter new lines or territories much more quickly without the “baggage” of run-off claims to deal with.

Program Business:


A number of insurers have developed a business model based specifically on the concept of outsourcing various key functions, not just as an “afterthought” or as a means of reducing existing costs, but as a basic cornerstone of their operations. These typically include areas such as underwriting and handling of claims, which traditionally were done by the insurer’s own employees. Some of these companies recognized that they could reduce their expenses by contracting certain processes to outside sources, while maintaining a relatively small home office staff to oversee and audit those functions.

This growing trend, often involving “Program” business, has contributed in recent years to the increased outsourcing of claims and other processes. Often these insurers will form partnerships with Program Administrators or Managing General Agents (MGA’s) which have successfully established a book of business in a particular niche in the market. This might be a fairly narrowly focused group of clients involving, say landfill operations or family owned hardware stores, or something a little more broad such as shuttle buses or small fleet truck operators. In most of these cases, the MGA has developed a detailed understanding of its program, including creative approaches to the risks, rates, and coverage forms involved. It may have built a network of retail agents to concentrate on the specifically targeted accounts involved.

The benefits involved can be significant for both partners in such a relationship. The insurer increases its premium volume by taking on an existing book of business which has already been established, and has a track record. The insurer also has the opportunity to take advantage of the MGA’s expertise and familiarity with the program. The MGA can gain greater control over what business is written and how it is written, and also have access to an established market to do so. In a typical program arrangement, the MGA will be responsible for the underwriting, rating, quoting, and binding of the business, including the issuing and servicing of the policies. In some cases, the MGA may even share a portion of the risk and potential rewards stemming from the program’s results.

Particularly in the recent soft markets, the interest of Property & Casualty insurers in this type of arrangement has increased. This not only includes larger insurers which have typically written certain programs like this in the past, but now includes many smaller insurers looking for new business opportunities. From all indications, this trend appears likely to continue, and the market for program business is expected to grow.

While in some cases a Program insurer may elect to have the claims handled by its own staff of employees, it is not unusual in these situations for the MGA and insurer to select an outside claim TPA to manage the claims that arise from the program.

Other Insurance Organizations:
                                                                                                                                                                                                                                                                                                                              In some cases, a non-U.S. insurance entity, such as a Lloyd’s of London Underwriting Syndicate acting as an insurer or reinsurer, typically through a broker or middleman in the U.S. or the U.K., may need domestic claims expertise and presence “on the ground” here to handle its claims. One of the simplest ways to do so is to contract with a TPA to handle the claims.

Self-Insureds:
                                                                                                                                                                                                                                                                                                                 Business firms or organizations sometimes elect to self-insure or retain a certain portion of their risk. In structuring their overall approach to risk management they might purchase some services from a traditional insurer or reinsurer, including excess insurance protection for large losses which exceed their selected level of retained risk, safety and loss control, or data capture and data management. The self-insured may not have the staff or expertise to handle its claims, or may recognize that there is no need to hire and retain highly technical resources for situations that occur only occasionally. It may elect to purchase claim handling services from its excess insurer as well, although in some cases, the services purchased from the insurer may be “unbundled”, and such aspects as claim handling contracted to an outside TPA.

Governmental Entities:
                                                                                                                                                                                                                                                                                                                       Many governmental or quasi-governmental organizations are also self-insured to some extent. Examples might include county or state agencies, school districts, public utility companies, and others. For many of the same reasons outlined above, these groups frequently elect to contract with an outside firm to handle such things as claim processing.

Conclusions:                                                                                                                                                                                                                                                                                                  
A TPA may be able to bring to the table specialized skills and expert services, not to mention lower overhead costs, which can contribute to various benefits for the outsourcing company. These can include increased efficiencies, reduced operating expenses, and in many cases improved customer service. All of these factors can obviously help the insurer, reinsurer, or self-insured be more competitive. With greater competition, drastically reduced investment incomes, and various other market factors affecting profitability, more insurance organizations are coming to recognize the potential benefits of outsourcing, and this increasingly includes the claim process