The growing trend towards larger retentions and self-insurance has meant that organisations are faced with a number of administrative areas that were traditionally handled by insurers. Claims handling and other services come as part of the insurance package, but few self-insureds are able to provide such services in-house. As a result, the Third Party Administration (TPA) market has grown up, offering all sorts of services, focusing largely on claims handling. The market includes loss adjusters, risk management consultants, brokers and specialist TPAs. This special report looks at the role of the TPA, the benefits and drawbacks of outsourcing or unbundling services and a look at what is driving the growth of the TPA market.
Rising to the top
As many companies are deciding to outsource their claims function, Steve Prince charts the continuing rise of Third Party Administrators (TPA) to deal with this function
THERE IS a lot of discussion at present concerning outsourcing throughout industry as a whole. Within the insurance and risk management community it is probably the claims function that is the most popular candidate for this approach.
The whole outsourcing arena is a mine-field waiting to catch the inexperienced and unwary. For many companies the decision to outsource the claims function, or any other for that matter, is quite likely to be their first attempt at outsourcing. In this environment how do you decide to outsource and what are the options available?
These are big questions and it is not surprising that many companies turn to third party administrators (TPA) for solutions as they have an established track record in this type of activity.
Before considering the merits it is important to understand exactly what a TPA actually is, and how they originally came into being.
The TPA concept was created in the US many years ago in response to the growing self-insurance marketplace and the unbundling of the traditional insurance product. If a client decided to take a high level of self-insurance, either through a captive or a simple loss fund, then the immediate benefit was that the premium fell considerably as the client was only buying excess cover. As a result of this, the insurance company could not provide a claims service for the losses within the self-insured element as the premium was not sufficient to support this. Clients at this stage either did not have the skills or did not wish to handle their own claims so the TPA market was created.
It is also important to remember that the TPA provides services beyond claims handling. This is because they were created to perform all of the functions that an insurer would provide including risk control, information management and general administration management and general administration services. This is why the term ‘administrator’ is used rather than just claims handler.
From these early beginnings, TPAs have developed in line with the market-place in which they operate. The main skill of a TPA is to handle a high volume of claims very efficiently. Unlike a loss adjuster who traditionally handled one-off assignments of large or technically complex claims, the TPA tended to be involved in the smaller high frequency losses where different skills are required.
The key to success was to have access to a sophisticated risk management system that enabled the TPAs to manage and keep track of the thousands of files under their control, to handle the payments and maintain financial records and to be able to provide clients and excess insurers with a whole wealth of data to better help them manage their business and control losses.
Less than 10 years ago this meant using powerful and therefore expensive main-frame technology and this in itself was a barrier to the creation of new TPAs. Today technology is readily available fairly cheaply and this has enabled many companies to enter the market. The loss adjusters in particular have been quick to enter what is a growing market when many of their traditional sources of business are under threat.
Today, TPA services are available from a whole range of providers including loss adjusters, solicitors, insurance companies and, of course, dedicated TPAs.
Within the classic definition of a TPA these organisations need to provide something more than just claims services. In reality however, this is rather irrelevant in a large number of cases.
Volume claims arise in two basic categories:
• Directly from a client who is self-insured;
• From an insurer who is looking to outsource the claims function.
While sharing the common ground of high claims volume, these are two distinctly separate markets with different needs. The self-insured is probably seeking greater control over their programme and more involvement in the claims process whereas the reverse is probably true for insurers.
Similarly the self-insured will be looking for a great deal of risk management information to help make informed decisions and to drive the risk control programme. The insurer on the other hand will be looking for a different type of information as the claims handled will involve hundreds or thousands of different insureds in a variety of different business. The most common area for insurer outsourcing is personal lines business (either motor or household) and this is a totally different business from that of a large conglomerate.
There is however, one very important common aim and that is to lower costs.
Large corporations and public authorities use self-insurance as part of an overall risk management and risk financing strategy which in its simplest form is aimed at lowering the cost of risk, that is, reducing costs.
Similarly one of the major reasons for an insurer outsourcing is to lower costs. Of course, they may also be looking for additional services that have become a necessary requirement and which will cost them a prohibitive amount to create. Good examples of this type of service are accident management and the provision of 24 hour call centres. Personal lines clients in particular expect to receive a high level of service and it is costly to build up this type of network.
For a large insurer, the claims function has often been allowed to develop in a free form environment and as a cost centre function. It is generally accepted, that profit centre cultures tend to be more efficient and this is why even the current Labour government is continuing with a wide-ranging privatisation programme. When the market is soft there is tremendous pressure to lower costs and inevitably the focus falls on the cost centre areas of which claims is by far the biggest. For a TPA to be successful it must be able to show demonstrable savings together with an enhanced level of customer service.
It is an interesting fact that some of the largest outsource deals involve the transfer of a larger number of the insurers’ existing staff. Where do the savings and improvements occur in this type of situation? Clearly systems have their part to play, but in my opinion by far the biggest factor is the cultural change from cost to profit centre. Staff become more motivated as they feel that they are the most important part of the company. Since the TPA’s main focus is claims, the claims handler is king.
While all insurers recognise the vital role of the claims department this is not their entire focus and in a soft market when expenses need to be reduced it is often at the expense of the claims department. It is very easy to create a demoralised workforce in this environment and alised workforce in this environment and this in turn has an impact on productivity. Of course, there is always a danger in generalising as there are clearly many fine claims departments within insurers.
One must also recognise that outsourcing is rarely total. The insurer generally is seeking to outsource the high volume, low value claims and retain control over the larger and more complex cases. They will also have very strict reporting limits and service standards so that the service being provided to that insurer’s clients is customised and controlled. Most people would agree that good claims handling is one of the best adverts for any insurer and conversely, bad claims handling will cause untold damage to the company, its reputation and ultimately its profitability. It would therefore be a foolish decision not to have a very hands-on approach with the outsource provider.
Outsourcing also allows for more flexibility as the infrastructure risks are the responsibility of the TPA. As the nature of the insurance business has changed with numerous consolidations and changes in the way that business is transacted many insurers have found themselves with surplus personnel and offices. In the outsourced world insurers do not need to consider these issues. Neither do they have to worry about the acquisition of large volumes of claims in areas where they do not have representation or claims expertise – this risk can simply be passed to the TPA. Insurers do not have to use the same provider for all their outsourcing. There are specialists in the TPA world as there are in other disciplines and this gives opportunities for the insurer to seek the best in everything that they do.
In this fast changing environment it is possible to devise new products and to enter new markets, but many insurers are prevented from doing this as it takes time to train claims personnel. Using the services of a TPA lowers the entry costs for insurers wishing to develop new markets and products.
There are pitfalls, but if a TPA can provide a better claims service, more cheaply and efficiently, then this route is impossible to ignore. Similarly self-insurance continues to grow in the corporate sector and this again presents a great opportunity for TPAs.
The future certainly looks bright for the provider of TPA services working in partnership with the traditional players.