Know the Risks: Outsourcing to Third Parties in the Insurance Industry
September 09, 2022
Carriers that choose to outsource to two specific types of third parties — MGAs and TPAs — may find 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 the claims administration to a third-party administrator (“TPA”), carriers have a wealth of choices for engaging third parties.
Unfortunately, the types of risks associated with an MGA or a TPA can also seem endless. These third-party entities are outsiders, after all, and that brings unique exposure for carriers beyond their business confines. While gaining a sense of control is not always easy, insurers that are aware of the risks associated with MGAs and TPAs can potentially mitigate issues and gain better outcomes.
Risks Associated With MGAs
Often, insurance carriers will use an MGA to underwrite submissions, issue insurance quotes and policies, collect premiums, perform statutory reporting or process claims. Here are three select risks:
- Deviation from the underwriting guidelines — Carriers could face significant reputational and financial repercussions if the MGA bound the carrier to risks that were outside of the carrier’s authority (e.g., limits, territories, lines of business, classes of business).
- Improper reporting of underwriting production reports to the carrier — Any deviations from an agreed-upon timeline could result in the carrier experiencing operational difficulties in preparing financial statements.
- Commingling of carrier trust funds with other carrier or MGA funds — When premium funds are collected by the MGA on the carrier’s behalf, the MGA may go against the agreement and commingle premium trust funds with its company operating funds or other insurers’ trust funds.
Risks Associated With TPAs
A TPA typically handles administrative responsibilities such as claim administration, loss control and risk management information systems on a fee-for-service basis. Here are three select risks:
- Departure from claim-handling guidelines — Carriers expose themselves to extracontractual obligations if claims are denied without merit or improperly disputed. Additional risks exist if the TPA does not follow claim-handling guidelines or service-level agreements.
- Inaccurate loss run data — The TPA may report loss run data inaccurately or miss deadlines, which puts the carrier at risk of not having the proper reserves 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 for its exposures.
Carriers with MGA and TPA agreements that predate the COVID-19 pandemic should take the opportunity to review the 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, performing due diligence, having a comprehensive agreement in place, and carrying out routine inspections of MGAs and TPAs are all recommended.
For more detail on the potential risks when outsourcing to an MGA or a TPA, and how carriers can mitigate these risks and obtain better outcomes, read the full articles here:
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