How the U.S. insurance, reinsurance markets are increasingly reliant on TPAs

Despite difficult macroeconomic circumstances, the insurance market has seen green shoots of recovery after years of depressed rates. We have seen combined ratios, excluding catastrophic losses, improve markedly and new entrants, both excess and surplus and admitted, emerged in recent months.

The improvement has been uneven, however, and carriers have worked hard to allocate capital to where opportunities are more abundant. Pockets of profitability are proliferating. Flexibility and elasticity are needed to take advantage of this upturn. By taking advantage of a third-party administrator’s (TPA) offering, new entrants into the market can manage their claims without initially investing in expensive claims systems and teams. This is a niche that TPAs have successfully occupied over the past few years, as the TPA sector has matured into a core piece of the U.S. market’s profitability puzzle.

And it is the niche TPA’s that have been most successful. This is partly because they are very responsive: key executives are a phone call away, readily available to answer any concerns. Pooling talent in a specialist line offers additional advantages. They can readily align with the carrier’s values and issues can be reacted upon quickly.

U.S. TPA trends

TPAs with strong client relationships have had an advantage during the pandemic, as face-to-face marketing is limited and pre-existing contacts are the main source of additional revenue. As the possibility of an active conference season opens in the fall, that may change; for now, growing existing business with key clients should be the main focus.

One trend that has driven insurers to seek local expertise has been the increase in litigation outcomes, unevenly distributed among jurisdictions, sometimes even between neighboring court districts and counties. Public entity business is the most prominent line affected, though we have seen several particularly high awards in other classes of business, including habitational and construction. TPAs are able to access large networks of local loss adjusters with proven knowledge of venues, attorneys and courts, providing invaluable insight to the client.

Emerging risks such as cyber have also been a key driver of new business for TPAs. The volume of cyber claims has significantly increased. TPAs are flexible and pool expertise to handle these claims trends; perhaps most importantly, they can hire specialists based on a client’s needs and volume. Claims are a TPA’s sole focus; they can take steps to anticipate developments. The very best try to attract expertise from outside insurance, including cybersecurity specialists for the cyber market.

A lean operating model

The model most recent U.S. and Bermuda startup insurers have adopted calls for flexible, outsourced expertise. Structured around a lean operating formula, with core underwriting staff in-house and outsourced claims departments to boost scalability and reduce cost, carriers need the ability to have a full-service claims department without having to hire expensive teams for each product. The cost can be prohibitive. Therefore, to take advantage of the emerging pockets of profitability in the U.S. market, carriers need to be able to expand rapidly in certain areas. The solution here is to hire a quality TPA.

TPAs are investing in claim management systems to provide more granular loss data, seamless data transfer and transparency. This allows underwriters, actuaries and claim management teams to fully understand their loss development and identify wider trends, particularly vital if your operating model is as lean as some have become. In addition, carriers can move books of business from underperforming TPAs more efficiently or consolidate legacy business and reduce the number of TPAs that they must manage.

Aligning your vision

Carriers should take great care when choosing a TPA. It will often be the main point of contact for the insured, which can have a positive or negative impact on the reputation of the carrier. The TPA must therefore understand and share your vision. With expertise, talent and commitment, the TPA segment can grow and help in the turn to a profitable U.S. insurance market. Utilizing the right TPA should be a key element in any company’s strategy for success.

Edward Quinn Jr. is president & CEO at Rockville Risk Management, a specialty third-party administrator. For more than 30 years, Rockville has evolved from a niche loss adjustment firm to a market leader in claims administration and consulting by delivering deliver flexible claims solutions to insurance/reinsurance companies, self-insured corporate and public entities, program administrators and coverholders. The opinions expressed here are the author’s own. 

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