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By CYRIL TUOHY, managing editor of Risk & Insurance®

In August, Risk & Insurance® Managing Editor Cyril Tuohy interviewed Mike Riney, president and CEO of third-party administrator Risk Enterprise Management Ltd., about trends in the TPA marketplace.

Q: What trends do you see in the TPA marketplace right now?

A: The TPA business generally tracks with the insurance business, which generally tracks with the broader economy. However, they don't always move in lockstep. Because they generally track, the insurance industry right now, given the broader economy, and the TPA business are in a time of potentially significant change.

Workers' comp claims frequency continues to decline. It has declined by 4 percent last year after a 2.7 percent decline in 2007, and we are seeing that trend accelerate. Frequency has declined because of a number of items. Certainly, there is the economy's decline in overall employment. Anecdotally, concern about job security is said to influence worker willingness to make workers' comp insurance claims. That's what a number of industry articles and blogs suggest.

We can't say that that's a fact, but there's a certain logic to it. If a worker is concerned about keeping his or her job, they may perceive the possibility of losing their job if they make a workers' comp case. That should not be the case. There are non-retaliation requirements built in, but the fact of the matter is that intuitively it sounds like that makes sense. So because of that, a lot of TPAs are scrambling. They are seeing their source of business declining. REM has been fortunate in that sales have been strong.

Even with workers' comp being 63 percent of our business, we have been making a conscious effort to diversify, and we have been pretty successful, with strong sales in casualty as well as runoff over the last year. We're up about 3.5 percent in revenue in the first half of 2009 compared with the first half of 2008.

Clearly the effects on pricing, on competitive strategies in the marketplace, the intent of the marketplace to protect and hold on to renewals, has in some cases resulted in opportunities that have expressed to us otherwise an interest in switching have elected not to. That said, we are seeing more opportunities, and our pipeline is stronger now than it has ever been.

Q: Frequency has gone down, but severity has gone up in workers' comp, with a softer economy. Does that mean a contraction and/or consolidation in the third-party administration marketplace?

A: The mergers and acquisitions activity in the TPA business has slowed pretty much, as it has in the broader economy. Following the unavailability of credit and capital, there has not been a lot of M&A activity in the TPA market in the past 18 months. Will that pick up? Yes, it will.

The underlying characteristics are there for potential consolidation and I think there will be some values out there as well. We are well-positioned as a potential consolidator. We are not interested in making consolidations just for the sake of consolidating or necessarily getting bigger, but for an acquisition that supports our existing and current strategy--or maybe an option to diversity or strengthen the company.

One of the segments we have not talked about is the program business; it is about 10 percent of our business, double what it was last year. The managing general agents, program administrator companies are in that space; and there are some new insurance companies in that space.

We're growing that segment, and going forward will provide information to customers to support more successful risk selection, such as correlating claims information with their applications (for coverage) process so that Program Administrators can better evaluate their loss outcomes.

October 1, 2009

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