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The Importance of TPAs in a Captive Insurance Company’s Success

By Chris Kramer

The proliferation of small to middle-market firms with better-than-average loss ratios and the desire to manage their own risks and have control over insurance costs has changed the landscape of the captive insurance market which was once the sole territory of larger firms. Once a firm’s profile (strong balance sheet, long-term commitment to risk financing, capital if needed, proactive risk management approach, etc.) and a feasibility study supports it’s a good candidate to consider a captive, there are several factors in successfully implementing a captive, including choosing the right type of structure, the captive’s domicile, and captive management firm to oversee licensing and regulatory compliance, accounting and financial reporting, and coordinate with third-party service providers. Having the right outsourced, specialized service providers to implement the captive’s day-to-day operations is critical, including choosing the Third-Party Administrator (TPA) charged with handling claims.

What makes a good TPA? In addition to gaining a clear picture of the TPA’s financial strength and capabilities, it is also important to know that the type of services provided are aligned with the risks covered by the captive. For example, a captive for Workers’ Compensation requires a TPA to provide Medical Bill/Utilization Review, Medical Case Management and Pharmacy Benefits Management. Moreover, the TPA must be able to meet the client’s data needs, provide consistent claims handling, and work to lower costs where it can. Other considerations that should be looked at when evaluating a TPA include the following:

  • Claims Systems – A strong claims system is an essential tool for any claims organization. Can the TPA capture information critical for the client, such as specialized loss codes or basic policy information? Does it use any other systems to help lower costs such as litigation management billing software or some unique estimating program?
  • Reporting Capabilities – It’s important to understand the types of loss runs and reports that can be provided. How frequent can these reports be provided? What format will they be provided in? Can specialized reports easily be obtained, or do is there a system for clients to obtain customized reports on their own?
  • 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 its claim handler’s performance? How often are claim files reviewed for good practice compliance internally? What metrics are used to ensure files are proactively managed and consistent across the board? If the TPA produces an annual internal audit report, can this be reviewed to see how it deals with deficiencies?

A TPA’s management structure, reserve philosophy, file loads per adjuster, employee turnover rate, and banking arrangements should also be reviewed.

At Caitlin Morgan, we specialize in providing captive insurance solutions and work with best-in-class TPAs and other third-party service providers to facilitate ongoing success for our captive clients. For more information about our captive insurance services, please give us a call at (855) 975-4949.