1. Expertise As to Third Party Administrators (“TPAs”).
TPAs in General. In general, an insurance company (or self-insured business or entity and employee benefit plan) can contract out certain of the traditional insurance company functions to organizations such as TPAs. Generally, the relationship is evidenced by a contract, with the insurer (or other entity) retaining the risk of loss (liability) as to the effected insurance policies. In some states, TPAs must be licensed as such, whereas other states do not require TPAs to be licensed (of course, to the extent the TPA functions in a specific capacity itself requiring licensing, e.g., claim adjuster, the TPA would be required to obtain those free-standing licenses).
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Set out below are a few of the circumstances in which TPAs function in the marketplace.
TPAs as to Property Casualty Insurance Companies. As to traditional property casualty insurers, TPAs often process claims or certain aspects of traditional insurance company functions. Additional TPA functions can include producing the business in the first instance, the initial policy underwriting, policy issuance, premium collection, reinsurance contract servicing, policyholder servicing and other administrative functions. Indeed, there are any number of insurance companies that have no employees whatsoever; they simply contract out the traditional insurer functions to TPAs.
TPAs are also commonly used in commercial general liability (CGL) policies written with a large (in excess of $50,000) self-insured retention (SIR) that operates somewhat like a deductible, but rather than being paid at the time of a claim (when the loss payment is made to the claimant) the money is paid up front by the insured for costs, expenses and attorney fees – as the claim moves forward.
If there is a settlement or verdict within the SIR then that is also paid by the insured up to the limit of the SIR, before the insurer steps in and pays its portion. In such circumstances, a TPA can be contracted to carry out the claim adjuster function. Some self insured retentions can run into the millions of dollars and the TPAs can be large multinational (non-insurance company) entities that adjust related claims globally.
In general, although an insurer is free to contract out these functions, the insurer’s responsibility (at least as to the policyholder) for carrying out these contracted functions remains with the insurer. That is to say, the insurer can contract out the particular function (say claim adjusting), but cannot contract away their responsibility to the policyholder for complying with (for example) the provisions of the various unfair claims practices acts.
TPAs as to Life, Annuity and Disability Insurers. Similarly, life, annuity and disability insurers often contract out typical insurers functions to TPAs. In such instances, the above discussion applies to those TPA relationships as well.
TPAs as to Health Insurance Companies and Self Insured Entities for Health Coverages. TPAs are also significant players in the health care and managed care industry and are normally contracted by a health insurer or self-insured business (for health coverages purposes) for: (i) production of the business in the first instance; (ii) policyholder enrollment; (iii) policy issuance; (iv) premium collection; (v) claims administration; and (vi) other administrative activities. On the self-insurance front and by way of example, a hospital or provider organization desiring to set up its own health plan will often outsource certain responsibilities to a TPA.
TPAs as to Employee Benefit Plans. TPAs also handle many aspects of employee benefit plans such as the processing of retirement plans and flexible spending accounts. Many employee benefit plans have highly technical aspects and complex administration that can make using a specialized entity such as a TPA more cost-effective than doing the same processing in house.
TPAs as to Retirement Plans such as 401(k)s are often partly managed by an investment company. Instead of handling all the plan contributions by employees, distributions to employees, and other aspects of plan processing, the investment company may contract with a TPA to handle much of the administrative work and only handle the remaining investment work.
1. Expertise as to TPAs in General.
A. TPA Expertise as an Insurance Regulator. I have had extensive and substantive experience relating directly to TPAs including determining the TPA and insurer’s (or self-insured) obligations under their contracts. As a regulator, I approved the formation and authorization to conduct business and oversaw TPAs on a daily basis as they carried out their various contracted duties.
As a regulator for eight years in three positions: (i) Assistant Attorney General assigned to the Department of Insurance (Iowa); (ii) First Deputy Commissioner of Insurance; and (iii) Commissioner of Insurance), along with my staff, I approved (or disapproved) of the TPA contracts as entered into between TPAs and regulated entities. This regulatory action also included the approval of and regulatory oversight of their work under the TPA contract as well. In addition, I regularly served as an Administrative Law Judge in matters relating directly to TPAs.
B. TPA Expertise: NAIC. While Commissioner, I also served as a member of the National Association of Insurance Commissioners (“NAIC”), (including membership on its Executive Committee), the nationwide organization of all state insurance commissioners. That organization has responsibilities for establishing model insurance administrative regulations and model statutes for consideration by all of the states. While with the NAIC, I served among others as:
- Chair of the Life Insurance Committee. The charge of this Committee was oversight of all issues relating to life and health insurance products as well as life and health insurers, with many of those health insurers providing products through or together with TPAs;
- Chair of the Universal Life Insurance Task Force. The charge of this Committee was oversight of universal life and similar products; and
- Chair of the Life Insurance Product Development Task Force. While Chairman of this Task Force, I led the development of model disclosure statements for universal and indeterminate premium life products designed to assist consumers in their comparison of different types of life insurance products.
C. TPAs Expertise: American Academy of Actuaries. Along these same lines, I served as General Counsel and chief lobbyist to the American Academy of Actuaries, Washington D.C. The Academy is the national professional association for actuaries. These professionals are part of organizations (insurers and self-insureds) that routinely utilize TPAs. Further, many larger TPAs routinely employ actuaries.
D. TPAs: CEO of a Major US Insurance Entity. After serving as a regulator, I served as President and Chief Executive Officer for the National Council on Compensation Insurance (“NCCI,” Boca Raton and New York City), a nationwide industry-owned organization with about 1,500 employees with annual revenues of about $150 million that did (and does) business in about 40 states. NCCI was domiciled in Florida and did business throughout the U.S.
This means that while I was CEO, NCCI was subject to the full authority of the various state Departments of Insurance (“DOIs”) and subject as well to the various state Insurance Codes as well as the jurisdiction of all state and federal courts.
Among my responsibilities at NCCI was (together with my staff) to formulate all workers compensation insurance policy forms as used in our 40 states of operation. This work included drafting all policy language (tailored to the specific state’s insurance code) as well as drafting all endorsements and all other policy forms. In addition, my responsibilities included gaining state insurance department approval of all such policy forms as a condition precedent to their use as submitted by some 600 insurance companies. Many workers compensation insurers and self insured workers compensation employers utilize extensive TPA facilities in connection with the workers compensation policies and benefits. I know TPAs in connection with insurance and self insured facilities.
TPAs: Health Benefits: NCCI. The health benefits under workers compensation are pivotal coverages and those health benefits are provided by an array of health plans with those plans frequently using TPAs to deliver services. I am very familiar with the meaning and relevance of TPAs in this regard.
E. TPAs Expertise: Reinsurance Arbitrator. I am also one of about 200 certified reinsurance arbitrators (by ARIAS-US) and have sat as an arbitrator on various matters in which TPAs were part and parcel of matters in disputes between reinsurers and their insurers.
2. TPAs: Expertise as to Duties of TPAs.
A. TPAs. I have also had significant experience and responsibility in connection with determining and passing judgment on duties of Third Party Administrators. In the section above, I discussed my expertise in general as to TPAs. Here, I discuss my expertise as to TPAs in connection with their various duties. In particular, in my three regulatory positions previously described, I had daily responsibility to assure and to hold accountable all of the state’s TPAs for their related obligations. I did so through a series of action steps and tools. The action steps and tools included the following:
1. TPAs: NAIC Market Regulation Handbook. As Commissioner, I had as an available tool, the NAIC Market Regulation Handbook (“Examiners Handbook” or “Handbook”). Among other things, this Handbook sets forth standards to assess TPAs behavior relating to: (i) TPA operations; (ii) complaint handling; (iii) marketing and sales; (iv) producer licensing; (v) policyholder service; (vi) underwriting and rating; (vii) claims; and (viii) TPA contracts and written agreements. The Handbook is used by every department of insurance in the United States. The standards have been universally agreed to by all of the nation’s Commissioners of Insurance as adopted formally by them through the NAIC. The standards of the Handbook are universally recognized as appropriate standards against which to judge TPAs in carrying out their various contracted functions.
2. TPAs: Market Conduct Examinations. On a regular basis, my regulatory agency conducted Market Conduct Examinations of TPAs to determine whether in fact they were meeting all of their obligations to their insureds and others. This action entailed physically going into the TPA’s files to determine any errant action or inappropriate actions. As further discussed below, errant TPAs were warned, disciplined and prosecuted as required.
3. TPAs NAIC Financial Examiners Handbook. As Commissioner, I had available another tool, namely the NAIC Financial Examiners Handbook (“Financial Examiners Handbook”). Among other things, the Financial Examiners Handbook sets forth standards to assess TPA’s work in relationship to regulated insurance companies on a triennial basis. Among other documents reviewed by examiners in reaching financial conclusions are TPA matters. As with the Market Conduct Examiners Handbook, the Financial Examiners Handbook is used by every department of insurance in the United States. Similarly, these standards have been universally agreed to by all of the nation’s Commissioners of Insurance as adopted formally by them through the NAIC. The standards of the Financial Examiners Handbook are universally recognized as appropriate standards against which to TPAs.
4. TPAs Financial Examinations. On a regular basis, my Department conducted financial examinations of TPAs utilizing the Financial Examiners Handbook to determine whether in fact the TPAs were solvent. As with market conduct exams, financial examinations entailed physically going into the TPAs’ operations and studying files and other items to: (i) assure compliance with policyholder duties; and (ii) to assure that financial reporting matters were properly carried out. As further discussed below, errant TPAs were warned, disciplined and prosecuted as required.
5. TPA Complaints From the Public. On a daily basis, my Department received incoming consumer complaints as to TPA practices. This Consumer Protection Division was staffed by Department lawyers who resolved the individual complaint and equally importantly, also determined whether a TPA evidenced unacceptable practices — that is to say, whether the incoming consumer complaints in fact constituted a red flag as to the TPA’s potential behavior across the board.
6. TPA Prosecution. To the extent plan provider behavior required formal action (whether a result of complaints from the public or a result of Department investigation through a Market Conduct Examination or the Financial Examination), my Department prosecuted such TPAs under the state’s civil Administrative Procedures Act. In connection with such prosecutions, I served in various capacities during my eight years as a regulator, including serving as: (i) prosecutor (as Assistant Attorney General); (ii) as the decision maker as to whether to initiate prosecution in the first instance (while First Deputy and Commissioner of Insurance); and (iii) as the Administrative Law Judge (“ALJ”) who presided over the prosecution and entered findings of fact and conclusions of law as to TPA practices. I have served as an ALJ in scores of such cases where the TPA practices were the primary issues and I entered final decisions and orders in such matters.
B. TPAs: Expertise As to Duties of TPAs as an Insurance Industry Executive: CEO of a Major US Insurance Organization. I discuss my executive experience at NCCI under this section because in addition to expertise as to TPAs (discussed above), my experience at NCCI also resulted in expertise as to TPA responsibilities.
While I was President and CEO, NCCI was subject to the full range of authority of the various state DOIs as discussed above. As such, I am very familiar with the duties of licensed TPAs relating to their obligations and responsibilities to their brokers and the regulatory scheme in place by the various DOIs as to such matters.
While President and CEO of NCCI, I visited and physically toured and reviewed in excess of 400 insurance companies and gained direct exposure to the procedures and processes and standard industry practices of the U.S. TPA community in that any number of those insurers utilized TPAs in conducting their insurance operations.
C. TPAs: Expertise as to Duties of TPAs: General Counsel to the American Academy of Actuaries. As stated above, I served as General Counsel and Director of Government Relations for the American Academy of Actuaries. I mention it again here in connection with the duties of TPAs because Academy members included affiliation with virtually every TPA and every insurance company in America who utilized TPAs. The Academy’s Board of Directors was likewise made up of leading insurance company executives utilizing TPAs.
D. TPA Expertise: Attorney in Private Practice Iowa. As an attorney in private practice, I represented a number of insurer and self insureds and became familiar with applicable industry standards of practice relating to TPAs, including TPA duties to their contracting entity and the related duties of the insurer or self-insured organization that had contracted with the TPA. Those interests also included intimate involvement with TPAs as counsel to the: (i) Professional Insurance Agents of Iowa; (ii) the Iowa Association of Life Underwriters (life, disability, health HMOs, PPOs and POSs and annuity insurance agents); and (iii) Property Casualty Insurers Association of America. Each of these organizations had pivotal relationships with TPAs.
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