My understanding on why Companies opt for Third Party Administrators (TPAs) over in-house processing are as follows:
- Cost Advantage: TPAs offer cost savings for insurance companies. Processing claims in-house can be expensive, especially for smaller insurance companies with health portfolios under Rs 5 billion. In-house processing can cost around 10-12% of the premium collected, whereas TPAs typically cost only 3-5%. Even for larger health insurance portfolios of Rs 10-20 billion, the cost of in-house processing remains higher than using TPAs.
Why TPAs have cost advantage over inhouse processing?
Insurance companies will process claims only for their company. However, as TPA all 32 life insurance and all 30 general insurance companies are open to you. Hence, the scale is very different for TPAs .
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Risk Appetite: Insurance companies may not have the appetite to underwrite large corporate policies, such as those with annual premiums ranging from Rs 800-1200 crore, especially for sectors like IT. In such cases, TPAs enable insurance companies to manage these large policies by partnering with government insurers or other companies with the capacity to handle them.
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Continuity of Policy: Large organizations value continuity in their insurance coverage and prefer not to change their insurance provider frequently. By using TPAs, companies can maintain a consistent experience for their employees or members, even if they switch insurance providers. This continuity helps in ensuring a seamless transition and maintains the relationship between the organization and the TPA, regardless of any changes in the underlying insurance provider.
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