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Merger activity among third- party claims administrators is heating up, though the pace of consolidation is considerably slower than among brokers or insurers.
Risk and employee benefit managers may benefit from newly enlarged TPAs, which can offer additional technical expertise and services. However, self-insurers should continue to demand that TPAs continue to provide adequate personalized service.
A variety of factors, including a desire to expand into more geographic areas, are fueling TPA consolidations.
"I think it's inevitable that you will see more mergers and joint venture activity," said Jim Kinder, chief executive officer of the Self-Insurance Institute of America in Irvine, Calif., though he describes the current market as "exploratory."
"I think (TPA mergers) are happening, but you are just not hearing about it," said Donald Chapman, executive vp-finance of Crawford & Co., which made the biggest news on the TPA merger and acquisition front last year. "Most of the TPAs aren't publicly owned entities, so it doesn't generate the type of publicity that the merger of publicly owned companies does," he said.
However, "I don't think there is anything like the level of activity that we are seeing among insurers and brokers," said Rich McKenna, executive vp-claims management of Gallagher Bassett Services Inc. in Itasca, Ill.
One of the largest mergers among property/casualty TPAs last year was the combination of Crawford & Co. with a unit of Swiss Reinsurance Co.
Atlanta-based Crawford acquired Thomas Howell Group (Americas) Inc., formerly Swiss Re's U.S. claims management unit and a specialist in servicing large commercial property claims in the United States. As part of the same deal, Crawford merged its non-domestic operations with Thomas Howell Group Ltd. in London to form a new claims-services company called Crawford-THG Ltd. (BI, Oct. 7, 1996).
Crawford said it expects a broader international client base and greater large-claim expertise from the link with Swiss Re. Swiss Re expects to gain by being able to offer clients wider claims-handling services, especially in the oil and energy fields, said Mr. Chapman.
More mergers among prop-erty/casualty TPAs may be on the horizon.
"We are looking seriously at developing a merger strategy in 1997," said Gallagher's Mr. McKenna.
Gallagher, which specializes in handling property/casualty claims, is exploring the feasibility of buying small TPAs it knows, rather than growing internally as it has done until now.
Such small TPAs may feel threatened by the "very roiled" market and "cut-throat" local competition, Mr. McKenna said.
However, the fact that many consolidations already have occurred slows the pace of property/casualty TPA mergers.
The number of individual property/casualty TPA firms has dwindled to about 900 today from 1,500 in the past several years, though the number of individual offices has increased, said the SIIA's Mr. Kinder.
"TPAs are either very big or very small," he said. "The midsize TPA is the most vulnerable (to mergers)," he said.
Similarly, the market for mergers among life/health TPAs "is growing, and it will continue to grow," said Jim Gallagher, president and chief executive officer of International Benefit Services Corp., a Fort Worth, Texas-based TPA.
San Francisco-based broker USI Insurance Services Corp. last year acquired IBS, which offers life/health products primarily to
associations of professionals, including doctors and lawyers.
"With the industry migrating to managed care, we needed capital for the latest technical, computerized capabilities," said Mr. Gallagher, who soon will be installed as president of the Bethesda, Md.-based Professional Insurance Marketing Assn. That organization represents 450 TPAs dealing with insured programs.
IBS also expects opportunities to market property/casualty products to its current benefit customers. For example, it was able to help a horse show association obtain horse mortality insurance through a USI unit that already had those contacts.
In addition, Concord, Calif.-based Anchor Pacific Underwriters Inc., which had revenues of about $10 million last year, is acquiring Benefit Administration Corp., a small TPA in Fresno, Calif. The Fresno TPA offers group health, pension and flexible benefit plan administration services to employers and union trusts.
"This addition to the TPA side of our business will materially add to our operations in the San Joaquin Valley and add the benefit of servicing unions" as well as employer clients, James R. Dunathan, Anchor's president and CEO, said in a statement. He also said he hopes Anchor will be able to market its commercial property packages to former clients of its new acquisition.
Anchor also has signed a letter of intent to buy an undisclosed San Diego-area benefits TPA.
Among TPAs overall, "the tendency to consolidate will continue," said Crawford's Mr. Chapman.
Several factors encourage mergers among TPAs.
In many cases, TPAs' founders are entrepreneurs nearing retirement age who want to make succession plans.
Also, fronting insurers encouraged mergers in the past by requiring TPAs to have sophisticated data systems to meet their reporting requirements or be dropped from the insurers' list of approved companies, Gallagher's Mr. McKenna said.
Another factor encouraging mergers is client demand for national TPAs with full capabilities, said Raymond E. Hafner, president of Philadelphia-based ESIS Inc., a subsidiary of CIGNA.
Those buyers want lower cost and proven competency in several areas, including claims services, risk management information services, integrated disability management and 24-hour services that respond to work and non-work accidents and illnesses.
In addition, "in the large commercial market, more and more TPAs are being asked to specialize by industry type," such as the petrochemical industry, ESIS' Mr. Hafner said.
The effectiveness of a merger may depend on the corporate cultures of the merging firms, several observers said.
"There has to be a relative similarity in the view of the marketplace and the perception of what the client needs and how he should be treated," said Crawford's Mr. Chapman.
For example, merging companies should understand that a corporate risk manager client usually takes a broad approach to claims reporting. He wants the claim to be handled in a compassionate and efficient manner, and he wants good reports so he can determine the frequency and severity of losses, according to Mr. Chapman.
Risk managers and employee benefit managers may be able to profit from a TPA merger if they can use the expanded technical expertise and services.
Mergers among TPAs may help clients because "they gain a lot greater depth (of available skills) and a stronger TPA," said the SIIA's Mr. Kinder.
However, employers whose TPAs grow as a result of mergers may find themselves having to adjust to new people and practices.
"The key to a TPA's success is very, very personalized service," said the SPBA's Mr. Hunt. "The challenge for a TPA is to adhere to a balance between the desired efficiencies of size and yet being able to provide very personalized services."
In addition, clients also should be wary of the potential for conflicts with new customers of an enlarged TPA.
For example, a hotel chain may be concerned if it learns its TPA is merging with one that handles claims for another hotel chain. The existing client hotel chain may fear some proprietary information may inadvertently get communicated to the competing chain.
Theoretically, that type of conflict can cause "client erosion," said Gallagher's Mr. McKenna, though that has not been a problem for his company.