How Can Outsourcing to a TPA Be Challenging for Companies?

Outsourcing to a TPA can be dangerous, but adequate management and a detailed Agreement covering critical obligations can mitigate these risks. Periodic inspections of TPAs should be conducted to support current monitoring actions.

Fremont, CA: The International Risk Management Institute defines a third-party administrator (TPA) as a business that conducts various administrative functions on a fee-for-service basis.1 Insurance companies frequently carry out these activities, including claims administration, loss control, risk control information systems, and risk management consultancy.

Here are several hazards that arise when businesses outsource to a TPA:

Mismanagement of Claims Imprest Account

The claims imprest account must be appropriately handled to function successfully and reduce Carrier risks associated with the issue of claim settlement payments. This would include implementing suitable controls on check issuance and authority amounts. Adequate internal controls to guarantee the correct division of tasks should exist so that one employee issues the check, another employee verifies the check and accompanying backup for accuracy, and the remaining workers sign and send the check. Another safeguard that should be in place is that two individuals must examine and sign the check if the amount exceeds a certain threshold.

Because the TPA is in charge of issuing claims settlements, it must guarantee that the checks clear the interest account regularly by reconciling the bank statement with outstanding checks. This should include a plan for following up on unpaid checks that are 90 days old. The TPA must be aware of escheatment regulations in the states where they handle claims, and a clear process should be followed to escheat checks to the appropriate jurisdictions as needed.

Another technique to verify that TPA-issued payments have adequate money and clearance when offered for payment by the payee is to commence a positive pay procedure. Using this approach, the TPA would launch a daily upload to the banking system of the checks issued that day. This would also act as a precaution to reduce the likelihood of fraud.

It is also critical that the TPA correctly nets recovery checks against upcoming funds in the bank account and accounts for canceled checks to reduce the danger of overfunding the impound account.

Many of the risks mentioned above can be mitigated by the Carrier executing a periodic audit plan and having particular processes and procedures defined in the Agreement.

Incomplete and Manual Data Feeds

Failure to receive comprehensive, accurate, and timely loss data is a substantial risk to the Carrier. If loss data is not disclosed, the Carrier cannot adequately reserve for their exposures. Each of them might have an impact on both statutory and reinsurer reporting. In some instances, reporting is performed by manually e-mailing spreadsheets; in these cases, the Carrier must either upload the spreadsheets received or manually enter the financial figures. This might result in transmission delays owing to manual processes or information mis-keying.

To address these issues, the Carrier may request an automatic data feed transmitted on a specified day of the month or week. This enables accurate and fast reporting and uploading to the Carrier's system. The data transfer mechanism should be specified in the Agreement, and ongoing compliance should be reviewed regularly.