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In addition, inadequate loss run data could lead to poor risk analysis that could affect a decision to continue writing with an MGA or not.
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The TPA may report loss run data inaccurately or not on a timely basis, which puts the carrier at risk for not having the proper reserves recorded. The contract between the Carrier and TPA should include required minimum limits and maximum deductibles on E&O and Fidelity policies as well as listing the Carrier as an additional named insured in the event of a loss. The insurer is relying on the TPA to protect their funds and this includes protecting them from insurable losses to the Carrier’s funds. One of the risks that may not be at the front of the insurer’s mind when hiring a TPA is the potential that the TPA does not have adequate Errors & Omissions policies or Fidelity bonds in good standing. Risk of Insufficient Insurance Coverages for Insurer’s Benefit The Carrier can mitigate many of the risks noted above by having specific processes and procedures detailed in the Agreement, and by implementing an audit strategy on a periodic basis. It is also important that the TPA is properly netting recovery checks against future funding in the bank account and properly accounting for voided checks in order to alleviate the risk of overfunding the imprest account. This would also serve as a safeguard to minimize the risk of fraud. Using this process, the TPA would initiate a daily upload to the banking site showing the checks issued for the day. The TPA should also be aware of escheatment laws for the states where they handle claims and there should be a clear process followed to escheat checks to the corresponding states as necessary.Īnother way to ensure that TPA-issued payments have proper funding and clearance for when the checks are presented for payment by the payee is to initiate a positive pay process. This should include a plan to follow-up on outstanding checks that reach 90 days. Since the TPA is responsible for issuing claims settlements, they must ensure that the checks will clear the imprest account by reconciling the bank statement and outstanding checks monthly. Another control that should be in place that two people must review and sign the check when the amount is above a preset threshold. Effective internal control to ensure proper segregation of duties should exist such that one employee issues the check and another employee reviews the check and corresponding backup for accuracy and other employees sign and mail the check.
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2 This would include having proper controls over check issuance and check authority amounts. The claims imprest account must be properly managed in order to effectively operate and lessen risks to the Carrier as it relates to issuance of claim settlement payments. Risk Associated with the Mismanagement of Claims Imprest Account In addition, the Carrier should audit the TPA at least annually to confirm the implementation and adherence to the guidelines and SLA. In order to avoid risks associated with hiring a TPA for claims administration, the Carrier should ensure the claims handling guidelines are clear. The Carrier is also exposed to the risk that the TPA’s employees, contractors or the attorneys hired by the TPA lack the skills, experience or knowledge required to administer the claims.
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The TPA not having proper reserving techniques could cause financial harm to the Carrier, which could also result in reinsurance companies not being notified timely causing potential disputes. If guidelines are not followed, the Carrier could be exposed to claims that were denied without merit or improperly disputed the amount necessary to settle a claim can increase significantly due to lack of a timely investigation and handling of the claim. When outsourcing claims handling to a TPA, the Carrier could be exposed to the risk of the TPA not following claim handling guidelines or Service Level Agreements. Risks Associated with the Departure from Claim Handling Guidelines In addition to a separate article on top risks that carriers face when outsourcing to a Managing General Agent (MGA), in this piece we discuss the challenges and risks when outsourcing to an TPA. 1 These responsibilities are generally executed for insurance carriers and typically include claims administration, loss control, risk management information systems, and risk management consulting. The International Risk Management Institute defines a Third-Party Administrator (TPA) as a firm that handles various types of administrative responsibilities, on a fee-for-services basis.