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By CYRIL TUOHY, managing editor of Risk & Insurance®

Right now, times are tough for third-party administrators (TPA). There are too many TPAs chasing too few claims dollars. The weaker U.S. economy has meant a drop in claims frequency.

Temporary economic hardships aside, the TPA marketplace in the United States was in the midst of a structural realignment well before the onset of the Great Recession in December 2007, according to industry experts and TPA executives.

For years, claims were going offshore for processing where the costs were lower, for example. More manufacturers have been moving factories overseas and no longer need to have claims processed stateside.

In addition, TPAs have faced stricter guidelines imposed by carriers, according to Vance Root, executive vice president of Avizent, a Columbus, Ohio-based TPA that processes workers' comp and general liability claims.

Whereas a decade ago a large carrier like AIG might have had 60 TPAs approved to do business with it, for example, the giant carrier's successor, Chartis, now has, say, fewer than 25 approved TPAs.

The bottom line for TPAs is that it is much harder to compete and survive in the marketplace today than it was in 1992, especially for local and regional firms.

"The days of more third-party administrators are long gone," said Joe Boures, president of Specialty Risk Services (SRS), the large TPA subsidiary of The Hartford, the Connecticut-based life and property/casualty insurance giant.

Barriers to entry in the TPA marketplace are much higher today than they were 20 years ago, when the industry was in the midst of untrammeled growth, TPA executives also note.

The infrastructure necessary to operate a major national TPA is so expensive that only a handful of companies can afford to make a go of it and expect to survive.

With the industry having matured beyond the "free-for-all" of the early years, risk managers now expect TPA prospects to have a track record, before even considering entering into a claims deal.

"Few risk managers are willing to turn over their entire claims program to an organization that's not solid, secure and with a proven track record," explained Boures.

Over the past decade, change has occurred in some stratas of the TPA space, according to Dave North, CEO of Sedgwick CMS, the Memphis, Tenn.-based TPA once owned by Marsh.

"We've seen some consolidation in the third-party administrator marketplace. It's not a significant amount but it's an evolution through which providers who have traditionally concentrated on the business as their primary focus have grown and gained share and those that have dabbled in the marketplace either as a broker or an insurer are doing it less and less," said North.

Today, only a handful of TPAs allied with either a carrier or a broker remain.

ESIS Inc. is a subsidiary of Philadelphia-based ACE USA. SRS has the The Hartford connection. And Helmsman Management Services LLC, while smaller, is the TPA subsidiary of Boston-based insurance giant Liberty Mutual.

Of the four largest insurance brokers, only one, Itasca, Ill.-based Arthur J. Gallagher & Co., retains its TPA, Gallagher Bassett Services Inc., as Marsh and Aon long ago divested themselves of their stakes in TPA subsidiaries.

"The majority of the contraction in the marketplace has occurred primarily among the smaller TPAs," said David Patterson, president of ESIS Inc., with the most significant merger in the large-TPA space coming from Crawford & Co.'s purchase of Broadspire back in 2006. The contraction that has taken place has come largely from the small TPAs serving a limited geography or catering to specific niches, like excess workers' comp claims for school districts.

Put all the large and small TPAs together and you get an industry with annual revenues of roughly $10 billion. That's but a sliver of the larger property/casualty universe, which alone generated net written premiums of $434.5 billion in 2008.

Still, there's money to be made. As a group, TPAs are not going anywhere, even if insurance carriers that have traditionally administered insurance claims sometimes look down on TPAs as party crashers.

For an industry that barely existed 20 years ago, you might say that TPAs have done relatively well for themselves, and their customers are likely to become more dependent on the services they provide, even with insurance carriers continuing to manage the bulk of the claims.

Administering a claims program for self-insureds has become so complex that any astute Fortune 500 risk manager is likely to consider hiring the expertise of a TPA, according to Kathy Kukor, senior consultant for Risk International Services Inc., who also serves as the senior manager, workers' compensation, for Goodrich Corp.

"It's very cumbersome for organizations to do it in-house, so the question is: Do you have the carrier or the third-party administrator take on those responsibilities?" she said.

And that's before the pending health reform proposals by the Obama administration, which will mean more changes to the workers' comp reporting rules.

The past decade has also seen smaller independent TPAs focus more and more on specialty areas that played to their strengths and regional ties, according to North. These TPAs may have decided to focus on managing general liability, say, or workers' comp claims, but not both.

In other cases, TPAs have preferred to redefine themselves, as a property-loss adjustment company, for instance, giving up any national aspirations they may have had back in the early days of the industry.

"These are companies that are quite content being a $30 million- to $40 million-a-year company, and they would rather do that very well than become a broader player in the hopes of becoming a $100 million- or $200 million-a-year company," said North.

In the end it's up to the corporate risk manager to decide whether to hire a TPA, assuming her carrier will allow for the unbundling of claims.

David Jewell, director of risk management, with PetSmart, a nationwide retailer of products and services to pet owners, estimated that in informal discussions with peers about whether to use a TPA, "it's about 50-50."

Many companies prefer the bundled arrangement with their carriers as it's more convenient.

"Possibly, they don't have the resources to manage a TPA, or maybe they simply don't want to take on some added risk with a TPA," said Jewell. "Some companies also don't want to make a change that brings uncertainty to their cost of risk."

Either way, whether risk managers decline to use a TPA for their own reasons, or whether a company is forced to use one because of complex changes in reporting requirements, the TPAs are here to stay.

We are, after all, talking about a $10 billion industry. That kind of clout simply doesn't vanish overnight.

April 1, 2010

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