Most advisers are aware of the concept of multinational pooling, but many with multinational clients have not yet put it into practice. Paul Avis explains why they should.
Perhaps multinational pooling is seen as too complex, but there is huge potential for growth in this market, and UK-based advisers are perfectly placed to capitalise on the opportunity.
So, how does it work? Multinational pooling is a concept that links insured employee benefit plans worldwide for multinational corporations (MNCs). Employee benefits managers and risk managers worldwide use it as a financial vehicle to contain the potentially escalating costs of insurance, and to coordinate employee benefit plans across their organisations.
Pooling past and present
Multinational pooling in its current form has been around since the 1960s, with early pooling solutions aimed at enabling clients to benefit from their own good experience in markets operating ‘tariff rates': a constraint that has now largely disappeared.
Nowadays, in a multinational pooling arrangement, the local scheme will run as normal during the year, with premiums and claims being paid locally. The local results for each of a MNC's global operations are included in the pool, which will then be collated into a client's pooling report to give an overall result for the corporation. This process is often known as ‘second stage accounting'.
It calculates the surplus of premiums, less claims paid, and associated administrative and risk charges. This net figure is passed from the local insurer to the pooling network.
If a local insurer has incurred losses due to poor claims experience, it may be compensated if profits have been made in other countries.
Any overall surplus in the pool is passed back to the parent company by way of an ‘international dividend'. Although the payment is due to the parent company, about two-thirds of MNCs distribute some or all of the dividends to participating subsidiaries.
The traditional pooling arrangements work well for very large MNCs, with many local contracts covering a significant number of lives. Smaller pools can be a lot more volatile, potentially seeing a good experience over a number of years, resulting in high profit levels, however, one poor year could result in a substantial loss, possibly considerably more than the annual premiums being paid.
A very large loss would be a bad result for the MNC. If operating on a loss carry forward basis, it could wipe out any possible returns for several years to come. This may be an even worse result for the insurers in the pooling network, because it is possible that the pool would be cancelled, leaving an irretrievable loss. For both loss carry forward and stop loss models, the risk of a single heavy loss year is too great to justify running small pools.
The multi-employer pool
The solution offered is a multi-employer pool. This means that all smaller pools are combined in a single, larger pool: profits and losses are then measured across all the smaller pools as a one stop loss arrangement.
If the overall pool shows a profit, pay-outs will be made to the MNCs involved dependent on the results of their own pool. The returns for an MNC with a good claims experience will be slightly lower in a multi-employers pool than it would be in a single employer pool, but there is more protection during a bad claims year.
The potential for volatility increases as the number of lives insured lessens. Inclusion in a multi-employer pool is primarily decided by the number of insured employees in the participating pool, rather than by the premiums paid or the size of the MNC.
The reasons for multinational organisations to use pooling are primarily financial. At a recent seminar, 83% of delegates agreed their company used pooling to save costs, with 56% saying it was one of the top three methods used.
The savings may not come in the form of a dividend. Some pools are actively managed to break even, with savings being generated by managing the design of local policies and obtaining good local prices.
Other benefits derived from a multinational pooling network may be:
- Access to benefit and claim information across all subsidiaries, enabling the MNC to analyse and compare benefits spend;
- A single point of contact for international requests or issues;
- Improved local contract terms, such as Free Cover Levels;
- Easier transfer of employees between countries.
The gradual phasing out of tariff rates, which has opened up markets to greater competition, has reduced the size of international dividends. As a result, the other benefits of pooling are having a greater profile.
The flow of data is now considered almost as important as the financial advantages, particularly information on health and wellbeing across the organisation. 48% of international benefits managers stated central reporting and oversight was a main tool used to control benefit spends.
