Tag Archives: Captive Management

6 Essential Elements To Explore When Choosing A Third Party Administrator

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Don’t Roll The Dice To Choose A Good TPA Just Do A More Complete Due Diligence

A Third Party Administrator (TPA) is often the best way to handle claims for an organization. Many self-insured and captives choose to outsource their claims instead of creating their own internal operation (see my prior post of A checklist of the 8 critical issues to be concerned about when self-managing claims). Whether to get expertise in a particular areas, or not wanting to invest in the infrastructure to build a claims department, using a TPA can be a smart business decision. In fact, many insurance companies will outsource some, or all, of their claims for the same reason. Regardless of what type of company you are, choosing the right TPA is imperative. The TPA will become the face of your company for claims and, how well or poorly, they handle claims will be a reflection on your organization.

So what make a good TPA and what should you look for? In order to find out you must conduct a comprehensive due diligence of the TPA you are about to hire. This is especially the case when that TPA will be holding and managing your claim dollars. Besides understanding the financial strength and capabilities of the TPA, it is also important to know whether they will be able to meet your data needs, provide consistent claims handling, and work to lower costs where they can.

While not an exhaustive list by any means, below I address 6 essential elements, and questions, that should be explored as part of any due diligence when selecting a TPA:

  1. Claims Systems – A strong claims system is an essential tool for any claims organization. Take time to understand the capabilities and limitations of a TPA claims system. Can they provide remote access so you can review your claims online? Do they have a paperless file system? Can they capture information that would be critical to your organization such as specialized loss codes or basic policy information? Do they use any other systems to help lower costs such as litigation management billing software or some unique estimating program?
  2. Reporting Capabilities – With a good system loss reporting should be easy. Regardless, it is important to understand the types of loss runs and reports that can be provided. How frequent can they be provided? What format will they be provided in? Can you easily request specialized reports, or do they have a system that you can customize reports on your own?
  3. Litigation Management Program – Litigation management is one of those things that seem to be less emphasized in a lot of organizations. Nonetheless, this is an area that if ignored could result in higher legal costs. Ask if the TPA trains their staff on litigation management cost reduction techniques. How are legal bills reviewed and what kind of program is in place to review counsel performance? Do they have a panel of law firms, and if so how are those firms selected?
  4. Quality Control and Internal Audit – Consistent handling across multiple claim offices is difficult to accomplish without clear handling best practices and internal controls. Does the TPA internally review their claim handler’s performance? How often are claim files reviewed for good practice compliance internally? What kind of metrics do they use to ensure files are proactively managed and consistent across the board? If they produce an annual internal audit report, ask if you can review it and see how they deal with deficiencies. No operation is perfect, but how well they recognize and address problems can be very telling.
  5. Subrogation/Salvage Capabilities – Many claims organizations fail to actively push subrogation and salvage opportunities. These areas, when done correctly, can lower claim loss dollars and return money to the coffers. How aggressive is the TPA in driving these key cost savings initiatives? Do they have a separate unit, or are the handlers expected to manage subrogation and salvage? How are they tracking returns? Are their results within industry expectations for a particular line of business?
  6. Special Investigation Unit and Anti Fraud Initiatives – All TPA’s will tell you they train their staff and actively pursue fraud when identified. This information should be readily available and reviewable. Ask the TPA how many fraud referrals they made to the states for a given line of business. Is the number consistent with the industry expectations on fraud reports? Do they have an SIU onsite or do they use and outside vendor to manage fraud? Have the TPA’s claim handlers received their annual fraud training as required by certain states?

A few other items worth considering would also include:

  • Management structure
  • Reserve philosophy
  • File loads per adjuster
  • Turnover
  • Financial stability
  • Banking arrangements

Hiring a TPA is a critical process that must be reviewed carefully. Take the time to perform a thorough due diligence, or hire an expert to do it for you. Getting a comprehensive analysis will ensure you are choosing the best TPA for your organization.

A little extra effort in the selection process will pay dividends in the future with a better customer experience and lower costs.

Considering Forming a Captive? Maximize Your Claims Benefits In 3 Steps

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The Benefits Of Forming A Captive Are Great – IF – You Set It Up And Manage It Correctly

The use of captives as an alternative means for managing risk is growing rapidly  (read a nice overview of captives at the Captive Counsel Law Group). Changes in laws, increasing tax benefits and control over assets makes the formation of captives easier and more attractive for many companies. There are many complex issues that need to be addressed when forming and managing a captive which is why many companies will turn to captive management organizations, such the Towner Management Group, for insight and expertise.

One of the great benefits of forming a captive is the ability to manage and control claims directly. Some of the benefits of directly managing claims include:

  • Control over decisions on how claims should be defended and when to settle or take a matter to trial
  • The ability to direct the financial benefits of good claims handling to the captive’s (and company’s) bottom line
  • Using internal specialized knowledge of your industry to better understand and manage exposures and lower claim costs
  • Ability to rapidly address claims issues, reduces future losses, and directs claims knowledge to improve overall risk management

Controlling costs, making decisions on what claims should be settled, and using specific industry expertise can all help to lower costs, but only if the claims are managed correctly.

Failing to handle claims properly can result in increased expenses, greater losses and higher costs paid for reinsurance and excess coverage.

Claims Considerations for Captives

If a captive seems like the best way to manage your risks it is still important to consider how claims will be managed.

While it may seem like a good idea to self manage claims there is a lot to consider prior to making this decision. An assessment must be undertaken to ensure claims will be handled effectively while protecting corporate assets. Managing a claim requires a certain skill, and claim tracking systems and procedures need to be in compliance with a variety of regulations. As a captive you become the insurer and must handle claims in a good faith expeditious manner. Controls must be put in place and policies must be developed so the entire organization can benefit from the captive entity.

Tom Stokes, Managing Principal at Towner Management, and I recently discussed how captive managers handle claims. Tom has found that many captive owners “solve” the claims management problem by continuing to use their current insurance provider. As he noted,

“in these cases, the original carrier either picks up after a deductible to the captive, or acts as reinsurer. The problem with this solution is that risk managers may not approve of the way that the insurer handles their claims and then feel that they still don’t have enough control.”

Since control is one of the primary benefits, utilizing this method for handling claims can negate the desired results. Another problem can arise when an excess carrier or reinsurer is put in an adverse position with the captive owner and a conflict can arise. There is always a risk that an excess carrier settles claims on behalf of a captive for higher amounts to avoid claims reaching their layer.

Being aware of all the issues is critical before making a decision on how to manage claims, so when forming a captive, look at the following steps:

Step 1 – Determine what type of claims will be part of the captive

Understanding the nature of the claims to be handled in the captive is critical to knowing what type of operation should be put in place. How many claims do you anticipate getting? Are you prepared to staff and build an internal claims department? Are the claims specialized requiring advanced skill not available in the current organization? Are there extensive regulatory reporting issues like in workers’ compensation that need to be addressed? Answer the basic questions about what type of claims will be managed and then move on to step 2.

Step 2 – Consider how you want to handle claims

There are many ways to handle claims, but keep in mind that claims handing requires specific procedures and skilled handlers to be in place. Don’t think that your legal department or risk management staff can be converted into a claims department without additional training – the skills and requirements are different. If claims are to be handled in-house, it is especially important to establish controls and have systems to track and manage losses.

Another way to handle claims is by retaining a Third Party Administrator (TPA) to oversee and manage your files. There are many specialized firms that are well qualified to handle a variety of claims. Regardless, even if a TPA is retained, establishing expectations and monitoring their activity through regular auditing is critical to getting the most from their services.

A shared claims management arrangement, with association members or in the context of a group captive, is a great way to get the benefits of claims control while sharing costs for systems and staff. Pooling resources will have the benefit of specialized claims skills and decrease costs further.

For an interesting discussion of TPA management versus self-managed or a carrier model read Kathy Kukor’s article Trending Away From Self-Administration, Carriers in Risk and Insurance.

Step 3 – Establish a program to handle or monitor claims

If you are going to self-manage claims or handle them in-house then it will be important to set up your organization correctly (see me post on self-managing claims). Understand that files will need to be reserved, costs will need to be controlled, and all will need to be tracked using some kind of electronic system. It will be important to understand any reporting requirements for the types of claims you are handling, and make sure your system can provide the correct reports. Controls must also be put in place to prevent fraud and ensure company assets are not wasted.

At a minimum, a claims organization needs to develop or implement:

  • A claims system to track claims, make and record transactions, and provide metrics to measure and report claims performance (see my post on creating a claims system)
  • A consistent reserve philosophy for better financial planning and understanding of current exposures
  • Authorities and controls over payments and reserves to minimize fraud risks
  • Claim handling best practice guidelines (see my post on drafting claims guidelines)
  • Management programs over vendors to reduce expenses and enforce compliance with the captive’s wishes

If you decide to outsource claims to a Third Party Administrator, don’t forget that they are spending your company assets while acting on your behalf. The best way to make sure they are spending money according to the wishes of the captive is to monitor them closely through regular claim file audits.

A lot of thought has probably gone into the decision to form a captive and the best way to ensure success, and take advantage of the claims benefits, is to plan correctly and be prepared in advance.

Are you a captive that is getting all the benefits of managing your own claims? Tell us how.