While third-party administrators have a long history of serving the insurance industry and have bright prospects, they face a once-in-a-generation change: generative AI.
AI Incoming
Prognostications on the impact of AI are ubiquitous – with insurance claims ripe for transformation. Several opportunities exist for AI to enhance or redefine the claims process, such as:
• Fraud Detection
• Claims Prioritization
• Claims Processing
• Settlement
• Subrogation
While the possibilities are nearly endless, the trend is clear – AI is changing the nature of the claims business in a way that will affect the relationship between third-party administrators (TPAs) and carriers.
First, AI is changing the nature of claims administration by challenging where human interaction (and judgment) is needed. Simple claims will see auto-adjudication without the need for an adjuster. We are already seeing carriers experimenting with this approach in the event of simple auto claims where photos and documentation result in near-instant decisions.
Second, AI should have a deflationary impact on the cost of administering claims. Pricing assumptions to manage claims on behalf of another entity are largely driven by labor costs. AI will change this by creating capacity for claims personnel, achieving both margin improvement for the TPA and potential cost savings for the TPA's client.
Third, AI will affect non-claims administrative work, such as in the contact center. AI use cases are often focused on call deflection, but everything from workforce management to key contact center metrics (e.g., average handle time [AHT]) will be affected by AI, creating additional capacity and challenging key assumptions in the TPA model.
A Brave New World For TPAs
AI will challenge the TPA market, but it will also present opportunities for those nimble enough to take advantage of them. The market has had an 8% compound annual growth rate (CAGR) over the last five years, and the increased cost associated with claims administration will only increase growth for TPAs.
There are three opportunities for TPAs to provide greater value to insurance carriers:
- Embrace the Complex – AI will drive down the volume of simple claims that require adjusters. It will also highlight the need that carriers, managing general agents (MGAs), employers, and others in the insurance ecosystem have for expertise to process the most complex claims. TPAs that possess the expertise to manage these claims will be in a position to grow market share.
- Provide Data and Analytics Services – TPAs have an opportunity to leverage AI in their own operations to provide valuable insights to carriers and employers. Specifically, they can focus on providing data on what is driving claims for carriers to better underwrite in the future. This has historically been an area where carriers have struggled to gain insights.
- Loss Prevention Services – In an era where the frequency and severity of claims are increasing, understanding how to mitigate or even potentially prevent claims provides even more valuable insights, both to TPAs and their clients. TPAs that can gain insights from their data and engage in root cause analysis on behalf of their clients can develop business units focused on loss prevention.
Why Now?
The TPA market has historically been controlled by large players. Specifically, TPAs servicing large/jumbo carriers and employers for claims administration have been able to keep entrants out due to their size.
AI changes all of this. The ability to leverage AI and other technologies successfully will allow traditionally smaller players to compete with medium and large TPAs.
In addition to this, carriers, MGAs, and others in the insurance ecosystem are exploring creating their own TPAs to meet their unique needs. What once was an expensive capability is now significantly more affordable due to technical innovations.
TPAs that do not look to enhance their existing offerings with new value risk losing significant market share. TPAs can no longer afford to simply rely on their size and scale to keep entrants out of the market, particularly if they are not price competitive.
