NAIC Financial Analysis Working Group Proposes Mandatory Insurer Audit for Managing General Agencies and Third-Party Administrators

Aug 21, 2015


Given what it noted as a trend in insurers’ increasing use of managing general agents and third-party administrators for outsourcing various business processes, the National Association of Insurance Commissioners’ (“NAIC’s”) Financial Analysis Working Group (“Working Group”) has recommended the modification of Guideline 1090 by replacing its optional audit requirement with a mandatory one.

The Working Group has also proposed that a mandatory audit–inclusive of managing general agents (“MGAs”) and third-party administrators (“TPAs”)–also become an NAIC accreditation requirement.

The MGA and TPA outsourcing functions are covered by NAIC Model Laws.  Click on the hyperlinks below to view a current copy of each:

The Working Group noted that Model 225 requires an insurer to conduct an on-site review of the MGA’s underwriting and claims processing operations.  This was described as a ” . . . good internal control that helps to mitigate the potential adverse risks associated with this type of outsourcing.”  The NAIC’s Financial Regulation Standards and Accreditation Program requires states to have a regulatory framework for managing general agents similar to Model 225.

With respect to TPAs, the Working Group noted that Model Guideline 1090 requires these entities to maintain (and make available to the payer) complete books and records of all transactions performed on behalf of the payer.

Version 2 of Model Guideline 1090 includes the following provision:

Section 6.  Responsibilities of the Payor and TPA.  When a TPA administers benefits in connection with life, annuity, health and employee benefit stop-loss coverage for more than one hundred (100) certificate holders, subscribers, claimants or policyholders on behalf of an insurer, the insurer shall, at least semiannually, conduct a review of the operations of the TPA.  At least one such review shall include an on-site audit of the operations of the TPA.  The cost of such reviews or audits shall be borne by the insurer and not reimbursed by the TPA.  The requirements of this subsection shall not apply when the TPA and the insurer are affiliated.  

In a memorandum addressed to its parent Financial Condition Committee, the Working Group suggested that the NAIC consider:

  • The costs and benefits associated with updating the Model Guideline 1090 to contain a specific requirement for all insurers (as opposed to only the certain types)
  • That insurers conduct an annual on-site review of their TPA
  • Whether conducting an annual on-site TPA review could become a specific accreditation requirement for both aforementioned NAIC models.

Because the Financial Condition Committee is not responsible for maintaining Model Guideline 1090, additional coordination with other NAIC committees in determining the appropriate next steps will likely be required.

Colodny Fass will monitor this issue and provide additional information as it becomes available.



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