Selecting the right TPA for captive claims management

Ian Podmore, director Global Captive Consulting, and Denise Wade-Jackson, VP claims practice manager, litigation adviser at Hylant, look at how to get the most out of TPAs.

Few risk management strategies offer the kind of flexibility and advantages that come with developing a captive insurer. Captives are licensed insurance companies owned and operated by those they insure. They allow organisations to enhance protection, customise policies and capture and use underwriting profits that would normally go to a traditional insurance carrier.

When developing any type of captive insurer, there is a lengthy list of considerations and options, from what specifically will be covered, to the structure of the coverage tiers, to the domicile that will hold legal jurisdiction over every aspect of the captive’s operations. One consideration that doesn’t always spring to mind is the process through which claims will be managed.

Claims and satisfaction

As consumers, when we purchase insurance coverage for our vehicles or homes, our attention typically focuses first on the amount of premium we’ll pay. Ultimately, though, our level of satisfaction with our insurer is generally determined by what happens the first time we file a claim. We may have initially been thrilled with the low premiums charged by the carrier we chose, but if the claims process becomes frustrating or unsatisfying, we’re far more likely to turn elsewhere at renewal time.

Similarly, the decision about how a captive’s claims will be managed is a key determinant in an organisation’s satisfaction with – and the financial performance of – the captive approach. While traditional commercial insurers usually have their own adjustors and others who manage the claims process, organisations using the captive strategy lack the internal resources and expertise to handle that function.

“Using a TPA enhances governance by bringing a skilled third party to evaluate claims and ensure payouts reflect the organisation’s intent.”

Third-party administrators

For that reason, part of the process of establishing a captive involves engaging the assistance of a third-party administrator, commonly referred to as a TPA. The performance of the chosen TPA has a profound influence on ensuring that the claims process operates smoothly and achieves the outcomes the organisation anticipates. (In some cases, an organisation whose captive involves coverage from a commercial insurer might choose to use that insurer’s staff rather than a TPA.)

When it comes to claims management, TPAs manage the entire adjusting process, which involves investigating the claim, determining whether it falls within the scope of the coverage, evaluating the extent of any losses and then making an appropriate payout based upon the policy language. Typically, TPAs specialise in particular areas such as workers’ compensation, general liability and medical malpractice coverage. They might also offer legal resources – whether that’s staff attorneys or an ongoing relationship with law firms – to provide defence when a denied claim is contested.

“Proper due diligence, such as conversations with references, is vital and service-level agreements must be clearly defined.”

How claims are managed has a profound effect on a captive’s financial performance and compliance, making the choice of TPA one of the most critical decisions for the organisation using the captive strategy. In addition to bringing expertise the organisation probably lacks, using a TPA enhances governance by bringing a skilled third party to evaluate claims and ensure payouts reflect the organisation’s intent.

The right TPA will develop a deep understanding of policies issued by the captive, so they’re better able to determine whether a claim is legitimate under the policy’s terms. By taking a proactive approach to claims oversight, the TPA not only relieves the organisation’s leadership of the responsibility for this process but also protects the captive’s capitalization.

The nature of captives might create unique challenges for the organisation and the TPA, such as issues related to operating within multiple jurisdictions or specific types of claims that represent long-tail liabilities for it. Those aspects must be considered when making the selection.

Key TPA attributes

When seeking a TPA to address the many aspects of claims management, it’s critical to remember that this is not a one-size-fits-all situation. Every organisation and captive is unique, so it’s important to select the TPA that best matches the needs of both. That involves considering several key factors, among them:

Expertise and specialisation. The best TPAs offer access to claims professionals who have a deep understanding of the industry and the types of claims most likely to emerge over time. This applies to the personnel who will work with the captive, as well as the analytics that will help the organisation track claims and costs. Additionally, a TPA’s knowledge of specific regulatory and jurisdictional issues is invaluable.

Cost control. A TPA should operate efficiently, taking advantage of economies of scale, so administrative costs are kept to a reasonable minimum. Fees should be right sized for the captive and anticipated activity and structured in ways that contribute to cost savings, rather than adding costs when claims occur. The TPA should also identify opportunities the organisation can take to mitigate losses.

Data and analytics. A TPA should be able to provide real-time reporting and easy-to-understand dashboards. Access to data should be as seamless as possible, so questions from the organisation’s top leaders can be answered as responsively as possible. The TPA should also create benchmarking and analysis of trends, so the organisation can better identify opportunities to mitigate losses and optimise contributions to the captive.

Consistency and compliance. As a regulated insurance company, a captive must operate under the rules and laws of its domicile. As such, the TPA must be able properly to document the work it provides and maintain adequate audit trails. While domiciles are not involved in the selection of TPAs, most have a keen interest in the timeliness of claims handling and the accuracy of loss reports and other financial data used to create the statement of actuarial opinion, so the right choice will improve their relationship with the captive. The TPA should have well-defined, standardised processes that will ensure smooth operation and protect the captive and the organisation.

Captive manager’s viewpoint

When helping organisations establish captives and monitor their ongoing operations, effective captive managers operate at arm’s length. For example, while captive managers shouldn’t be expected to provide opinions on individual claims, they will review the TPA’s monthly or quarterly loss reports to provide an additional set of eyes on the process, the monitoring of the adequacy of the captive’s financial position and compliance with the domicile’s expectations.

Captive managers also provide a perspective that comes from working with many organisations, insurance carriers and TPAs. They know which TPAs provide a desirable level of service, not just in general, but within specific domiciles and regions. While they leave the choice of TPA to the organisation, their insight can help it avoid potential problems.

As noted earlier, the key criteria when selecting a TPA include industry knowledge, appropriate technology and overall experience with claims management. The organisation’s vetting process typically includes the use of RFPs. Proper due diligence, such as conversations with references, is vital and service-level agreements must be clearly defined.

Building relationships

The choice of TPA is not a short-term decision. In most cases, the organisation and the TPA will work together for many years, underscoring the importance of making the right choice in the first place. Just as every organisation is unique, every TPA has its own way of doing business and its own philosophies regarding claims handling.

Healthy relationships begin with well-defined roles and responsibilities, along with well-established communication protocols and processes for regular reviews. Integrating the TPA’s activities into overall governance and oversight of the captive builds shared understanding and efficiency. Reach can also be an important consideration, depending upon the nature of the organisation. For example, if a company does business outside the US, it might need a TPA with experience and resources in other regions.

All about people

Ultimately, though, the choice of TPA comes down to the people who will perform the critical work of claims management. While that’s always been important, it deserves even more attention in an era that is seeing widespread retirements of veteran claims professionals along with a shortage of skilled newcomers to the profession. That’s why due diligence should address staff longevity, turnover and caseloads to ensure consistency and efficiency – and a key element of that is talking with multiple clients of the TPA to gauge their level of satisfaction and comfort.

Finally, organisations must be acutely aware of placing complete confidence in the individuals who handle the TPA’s business development process, rather than in those they’ll work with on a day-to-day basis. It doesn’t happen frequently, but we’ve seen situations in which an organisation is wowed by a presentation but frustrated by what follows. Getting to know the people who will make things happen will dramatically increase the likelihood of making the right choice.

Ian Podmore is director, global captive consulting, at Hylant. He can be contacted at:  ian.podmore@hylant.com

Denise Wade-Jackson is vice president, claims practice manager, litigation adviser, at Hylant. She can be contacted at:  denise.wade-jackson@hylant.com

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