The Era of Third-Party Administrators in the Life Insurance Industry

The TPA Model (“Model 90”) originally adopted in 1977, amended in 1991, 1999, 2001, and 2011 is the only regulation governing the use of third-party administrators, (“TPAs”) by insurance companies.  Historically, health and workers compensation insurers utilized TPAs to assist in the administration of their policies.  During the Great Recession, life insurers required infusions of capital, sold blocks of business to private equity firms at a discount.  This trend has continued since 2008 considering the low-interest-rate environment and private equity’s investment expertise.  The private equity firms did not have the back-office capacity to administer the closed blocks of business; leveraging new automation and digitization creating efficiencies, escalated the use of third-party administrators in the life industry. 

According to the Research and Markets August 2020 report on the Global Insurance Third Party Administrators Market-Growth Trends, and Forecast (2020-2025), there has been a 5.1% growth per year between 2015 and 2019.  The market is highly competitive and complex for the life industry resulting from vast product features and legacy systems.

While the Model has been adopted by approximately half of the states, the primary vehicle governing the relationship between the insurance company and TPA is the contract which makes due diligence even more important, as litigation with your TPA is not practical.  From a risk standpoint, outsourcing policy administration to a TPA is critical due to the nature of services and the number of regulatory requirements and exposure.  Regulators hold the insurance company responsible for the acts of their TPAs – even if the TPA is negligent in performing its contractual duties. 

In the last number of years, there have been many regulatory settlements involving TPA policy administration including system conversions with 7 figure fines.  Further, the Department of Justice updated its Guidance for Evaluating Corporate Compliance Programs, Part E. Third-Party Management, calling out the due diligence and on-going oversight of third-parties.  See https://www.justice.gov/criminal-fraud/page/file/937501/download. 

If you are considering outsourcing or have already contracted with a TPA, you should refresh your due diligence and oversight program to avoid both reputational, regulatory, and legal risk. 

Download our TPA Due Diligence & On-going Oversight Checklist