Selecting the Right TPA for Captive Insurance Claims Management

When developing any type of captive insurer, there is a lengthy list of options. One consideration that doesn't always spring to mind is the process through which claims will be managed.

As consumers, when we purchase insurance coverage for our vehicles or our homes, we may initially focus on the amount of premium, but our satisfaction is generally determined by what happens the first time we file a claim.

Similarly, the decision about how a captive's claims will be managed is a key determinant in an organization's satisfaction with—and financial performance of—the captive approach. For that reason, part of the process of establishing a captive involves selecting a third-party administrator (TPA). Their performance has a profound influence on ensuring that the claims process operates smoothly and achieves the anticipated outcomes.

TPAs handle 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 on the policy language. Typically, TPAs specialize in particular areas such as workers compensation, general liability, and medical malpractice coverage. They may also offer legal resources to provide defense when a denied claim is contested.

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. By taking a proactive approach to claims oversight, the TPA also protects the captive's financial strength.

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

Every organization and captive is unique, so selecting the TPA that best matches the needs of both involves considering several factors, such as the following.

• Expertise and specialization. The best TPAs offer access to claims professionals who have a deep understanding of the industry. This applies to the personnel who will work with the captive, as well as the analytics that will help the organization track claims and costs. 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 loss mitigation opportunities.
• Data and analytics. Real-time reporting and easy-to-understand dashboards should be as seamless as possible so questions from the organization's top leaders can be answered as responsively as possible, along with benchmarking and trend analysis.
• Consistency and compliance. As a regulated insurer, a captive must operate under the rules and laws of its domicile. The TPA must be able to properly document the work it provides and maintain adequate audit trails. Well-defined, standardized processes will ensure smooth operation and protect the captive and the organization.

Captive Manager's Viewpoint

An organization's captive manager will review the TPA's loss reports to provide an additional set of eyes on the process, the adequacy of the captive's capitalization, and compliance with the domicile's expectations. The captive manager also provides a perspective that comes from working with many organizations, insurers, and TPAs. They know which TPAs provide a desirable level of service within specific domiciles and regions. Their insight can help the organization avoid potential problems.

The organization's due diligence typically includes requests for proposals and conversations with references. Service-level agreements must be clearly defined. Reach can also be an important consideration, depending on the nature of the organization. For example, if a company does business outside the United States, it may need a TPA with experience and resources in other regions.

The organization and the TPA will work together for many years, underscoring the importance of making the right choice in the first place. 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.

Ultimately, the choice 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.

It doesn't happen frequently, but we've seen situations in which an organization 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.