3rd Party Administration

When I moved to Canada from the United States more than 14 years ago, third party administration (TPA) in Canada was still in its infancy. A TPA processes insurance claims or certain aspects of employee benefits plans for a separate company. Back then, the term ‘TPA’ was seldom used. When it was used, the position of a TPA adjuster was commonly characterized as being similar to that of an examiner at an insurance company.  

Much has changed over the years. The Canadian TPA market has developed its own personality in response to the needs of the consumer. Restrictions in the market and the unique culture of Canadian society have resulted in various incarnations of the standard concept.

When should a TPA be selected?

When determining whether or not a TPA is the right option for a particular program, a risk manager must consider the relative strengths and weaknesses of the TPA model and the application of the TPA model to the risk being considered. TPAs are often suitable for programs featuring a high frequency but low severity of claims. A TPA should also be considered when it is of paramount importance to the company to retain decision-making control for reasons such as maintaining the integrity of reputation, profile, brand or product. It is also important to consider the anticipated risk retention level: the benefits of a TPA may be reduced when a low self-insured retention (SIR) or deductible is in place, since the authority of the TPA would only be within the retention level.

TPAs: Desired qualities and design Clear Lines of Authority

It is important to identify whether the TPA under consideration is capable of providing the service required, both from a quality perspective and from a direction and control perspective.

Do adjusters know who their boss is? Who is holding the reins? Who is in charge? It might seem apparent when a program is contemplated, as well as throughout the selection process and implementation phase. However, on the front lines, the TPA adjuster can become confused when attempting to interpret fronting arrangements — for example, when the carrier issues the claim payments and adjuster fees and then invoices these fees back to the client.

In addition, it is commonplace for independent adjusters, lawyers, contractors and other vendors to make routine enquiries into a reporting and authority contact at an insurance company. Without proper direction and control from the TPA, an unauthorized vendor or carrier could make decisions without proper authority. A vendor’s unfamiliarity with the TPA model, which is relatively unique, is understandable. But such unfamiliarity cannot be tolerated at the TPA. Unfortunately, it happens because of the relative size of the TPA talent pool compared to the overall adjusting talent pool. In other words, independent and staff adjusters do not have the specialized training to function as TPA adjusters. Therefore, proper training and supervision must be given to new hires.

Centralized Claims Management

One perceived disadvantage of TPAs in Canada is that they are typically located in one location and yet service the entire country. Seen from a different perspective, the single location may in fact be an advantage: the adjusting team can build a claims management philosophy centered on the client, rather than focusing on the local field adjuster or branch manager who may have little interaction with the client. Of course, fieldwork is necessary in handling catastrophic or niche situations. But in this technological era, featuring cell phone cameras, scanners, email and recorded statements, the need for fieldwork is substantially diminished.   

Data Management      

In the past, the cost to establish and run an effective risk management information system (RMIS) was a significant barrier to entry for new TPAs. Technological innovation has eliminated this barrier. In fact, new TPAs might have a competitive advantage, since they are not burdened with potentially outdated systems. State-of-the art systems are now fast, adaptable, cheap and user-friendly.

In the past, insurers were concerned about an inability to establish a reliable and accurate data feed that met the carrier’s internal needs while at the same time providing the data required to comply with federal and provincial reporting requirements. Cost was a factor, given the historically modest market share of TPA business in Canada. However, as the TPA market share has increased, certain carriers have made substantial investments in IT infrastructure to facilitate this transfer of data. There are many competitive benefits to creating such a platform. Foremost, it establishes a sole entry point of data input. This eliminates duplication and reduces the risk of data integrity issues. The challenge for the TPA now is to adopt a RMIS system that can transfer data easily to the carrier.

Cost of a TPA

Used effectively, a TPA should result in significant savings in both indemnity dollars and expense costs. TPA adjusters are typically compensated based upon their performance in audits, client satisfaction surveys and closing ratios. Therefore, it is in the adjuster’s best interest to achieve a fast, fair, frank and friendly resolution. TPAs are usually compensated on a “fee-per-claim” or “cost-plus” arrangement. These arrangements allow risk managers to determine their claims costs more accurately. Independent adjusters and their companies are typically compensated for how many hours they spend on a file. They play a very important, yet minimal role in a TPA program. They play a far greater role in claim programs that do not fit within a TPA structure.  

Oversight and control of a TPA

Oversight and management of a TPA must be a central component in any risk management program. Without a consistent schedule of audits, claim reviews, large loss meetings, staffing consultation and bordereau analysis (bordereau are detailed documents that might, for example, detail the history of a risk), a TPA program might produce an inconsistent product quality or result in leakage due to lost opportunity costs.

If the company designated as the TPA is also the independent adjuster, special attention must be taken to ensure field assignments are assigned only when necessary. This situation can create the potential for a conflict for the TPA, since fieldwork is usually a surplus cost to the TPA fees. The cost to administer oversight programs is relatively modest, but failure can prove costly.

The Future of TPAs

The TPA share of the overall claims management market has the potential to increase based upon several factors. These include a potentially hardening market; reduced accident benefits exposure; a clearer understanding of the TPA product; and heightened interest in the use of captives. If the potential of  TPAs is to be met and the cost of risk is to be reduced, the risk management community must carefully identify and use the TPA product effectively.

Headwinds that might slow the potential growth of the TPA market include the provincial management of the workers compensation system and the relatively small size of the self-insured market in Canada. Risk and claims managers tend to use consultants for workers compensation claim management. This is likely the result of a misunderstanding about how TPAs might add value in the area of workers’ compensation claims management. The overall difference in the cost of risk between guaranteed cost programs and large deductible/SIR programs has limited the market potential for TPA services.

An opportunity for growth in the TPA services exists if the markets harden and large SIR/deductible program offer a lower cost of risk.

The TPA industry will continue to evolve in Canada. It is up to the ris k management community to ensure its evolution continues to reduce the cost of risk.