Know the risks of outsourcing to third parties
Carriers that choose to outsource to two specific types of third parties – MGAs and TPAs – may encounter distinct challenges. A little knowledge can go a long way.
The variety of services offered by third parties to the insurance industry is seemingly endless. From outsourcing underwriting authority to a Managing General Agent (“MGA”) or claims administration to a Third Party Administrator (“TPA”), insurers have a multitude of choices for engaging third.
Unfortunately, the types of risks associated with an MGA or TPA can also seem endless. These third-party entities are strangers, after all, and this brings unique exposure to carriers beyond their commercial boundaries. While gaining a sense of control is not always easy, insurers aware of the risks associated with CSAs and APTs can potentially mitigate problems and achieve better results.
Risks associated with GAs
Often, insurance companies use an MGA to underwrite quotes, issue insurance quotes and policies, collect premiums, make statutory reports, or process claims. Here are three selected risks:
- Deviation from Underwriting Guidelines — Carriers could face significant reputational and financial repercussions if the MGA binds the carrier to risks beyond its control (e.g. boundaries, territories, lines of business, classes of business) .
- Incorrect communication of underwriting production reports to carrier — Any deviation from an agreed schedule could cause operational difficulties for the carrier when preparing the financial statements.
- Consolidation of carrier trust funds with other carrier funds or MGAs — Where premium funds are collected by the MGA on behalf of the carrier, the MGA may breach the agreement and mix the premium trust funds with its company operating funds or company trust funds. other insurers.
Risks associated with TPAs
A TPA typically handles administrative responsibilities such as claims administration, loss control, and risk management information systems on a fee-for-service basis. Here are three selected risks:
- Deviation from complaint handling guidelines — Carriers expose themselves to extra-contractual obligations if complaints are unfoundedly refused or unduly contested. Additional risks exist if the TPA does not follow complaints handling guidelines or service level agreements.
- Inaccurate loss cycle data — The TPA may report inaccurate ride loss data or miss deadlines, which puts the carrier at risk of not having the appropriate reservations recorded.
- Incomplete or manual data entry — Carriers may not receive complete, accurate or timely loss data. Without correct and accurate loss data, the carrier would not be able to properly reserve its risks.
Carriers with pre-COVID-19 pandemic MGA and TPA agreements should take the opportunity to review terms and stipulations. These contracts may not reflect the current state of the world, which looks drastically different than it did just a few years ago. Certainly, it is recommended to perform due diligence, have a comprehensive agreement in place and perform routine inspections of MGAs and TPAs.
For more details on the potential risks when outsourcing to an MGA or TPA, and how carriers can mitigate those risks and achieve better results, read the full articles here:
Challenges and Risks When Outsourcing to Managing General Agents
Challenges and Risks When Outsourcing to a Third-Party Administrator