Multinational Pooling
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Multinational employers may have as many benefit programs as there are local subsidiaries.
In each country, local programs will be set up according to that country’s legal
requirements and competitive practice and may — or may not — reflect the
employer’s worldwide benefit philosophy. Although premiums may be as low as possible
in each country from the perspective of that country, they may not be as low as possible
viewed from a global perspective. Two major reasons:
- Market conditions or insurance laws in some countries may limit the products or policy
terms an insurer can offer. Consequently, risk premiums charged on coverages such as death
and disability or investment returns paid on policies in those markets may not be as
competitive as they might be elsewhere.
- A multinational may have relatively few employees in one or more countries. Because
the ability to obtain favorable terms — including premium cost and experience rating
— is influenced by the size of the employee group, small groups generally pay more
for the same coverage, all else being equal.
Multinational pooling overcomes these two constraints on maximizing reductions in benefit
costs by offering an accounting procedure designed to leverage a multinational’s
global insured employee benefit programs.
How Pooling Works
The core concept of multinational pooling is simple: A multinational employer agrees, by
contract with an insurance network, to insure its local benefit programs with the local
insurers associated with that network, thus creating a multinational pool of premium
receipts and claim payments. Once premiums and claims are pooled globally, experience
rating — based on the actual, combined experience of the subsidiaries participating
in the pool — can be applied. The financial benefit of that experience rating,
realized in the form of a dividend payable to the parent (or disbursed according to the
parent’s instructions), is completely independent of — and may be in addition to
— any dividend payable locally.
Furthermore, multinational pooling does not affect local premiums or claim payments. Its
effect is solely at the multinational accounting level.
Advantages of Multinational Pooling
The primary objective of multinational pooling is to reduce overall insurance costs
through payment of a multinational dividend. Dividends arise in years when experience is
favorable. If experience is unfavorable, no additional costs are assessed against the
employer; the worst outcome is absence of a dividend, perhaps for several years. Thus, the
use of multinational pooling cannot cost an employer more that what it is already paying
in premiums. Although network administrators and insurers charge employers a fee to set up
and administer a multinational pool, the fee is subtracted from an amount that would be
retained by the insurers in the absence of a pool.
In addition to cost savings, other advantages include:
- Annual accounting of local costs and payouts on a centralized basis. The
availability of detailed information on group insurance costs around the world can be
useful for employer governance.
- Centralized communication. By interfacing with a single insurer at the
multinational level rather than with many individual local insurers or branches, an
employer can reduce administrative time and expense.
- Relaxed underwriting limits. Because insurers wish to protect themselves
against high risks, group life and disability coverages for executives typically are
subject to satisfactory medical examinations. By pooling lives in a number of locations,
the risk of adverse experience is substantially reduced, making insurers more willing to
raise or eliminate the limits at which medical evidence is required.
- Ability to transfer pension reserves or obtain uninterrupted medical coverage.
A multinational pool can sometimes facilitate transfer of pension reserves, elimination of
waiting periods, or waiver of pre-existing condition exclusions when an employee relocates
to another company operation.
Coverages Pooled
In principle, life, disability, medical, and personal accident insurance, as well as
insured pension/retirement annuities, can be pooled. In practice, however, poolable
coverages depend on the insurance network (and local affiliate) and country involved. In
addition, high-risk, low-premium coverages, such as accidental death and dismemberment,
personal accident, long-term disability, and some medical insurance can potentially
generate only small dividends but large deficits. Best practice is to exclude such
coverages from multinational pooling wherever possible.
Multinational Insurance Networks
Some multinational insurance networks are consortia of independent insurers:
- AGRI International Life and Pension Network
- Eureko
- Insurope
- International Group Program (IGP)
- MIA Benefits
Others are insurers that are themselves multinational companies:
- All Net (Allianz)
- American International Group (AIG), Group Management Division (GMD)
- Generali Employee Benefits
- Swiss Life International
- Winterthur Life and Pensions
- Zurich Employee Benefits
One is an alliance of two insurers:
- MAXIS (AXA and Metropolitan Life)
Accounting Components
A multinational-pooling account is a statement, prepared by the insurance network, that
presents the financial information for each covered policy. From this information, the
multinational dividend is calculated. This account sometimes is called a
“second-stage account” because it is drawn up after all accounting has been
completed under local policies (“first stage”).
Although actual format varies from one network to another, a multinational-pooling account
(or experience statement) normally contains these items:
- Credits
- Premiums paid by employer’s subsidiaries to local insurers: Some premiums
may be excluded for multinational-pooling purposes, that is, for calculating the
multinational dividend. For example, life insurance above $100,000 may be excluded; in
that case, the portion of the premium for insurance above that limit would not be
experience rated. (Shorthand jargon often drops the word “experience” from the
expression “experience rate,” so a term like “rated premium” means
“experience-rated premium,” that is, the premium taken into account to determine
the multinational dividend.)
- Investment earnings on premiums paid: Because premiums are paid in advance of a
period of insurance and claims are paid after occurrence of losses, insurers have funds to
invest during the interim. Rates of interest vary from country to country. In some cases,
the network insurer reduces risk and expense charges instead of crediting interest.
- Debits
- Claims: Amounts paid during year, such as life insurance claims; cash surrender
values; return of premium; medical expense benefits; and annuity benefits of retirees,
surviving spouses, and disabled employees.
- Risk charges: A cushion for insurers, to protect them against large claims. The
magnitude of a risk charge often is based on the number of lives covered. Frequently, an
employer’s risk charges will be lower under a multinational-pooling contract than
they would have been were there no such contract.
- Expense charges: Administrative expenses of insurers, including overhead and
profit. Sometimes, expense charges take into account the worldwide size of an account.
When comparing networks, any multinational dividend projections should include both the
first and a renewal year, because expense charges can vary significantly between the two.
Reflecting higher acquisition costs incurred initially, first-year expense charges are
usually higher than those during the first renewal. Starting with the first renewal,
expense charge levels generally stabilize. The local portion of expense charges can be
lower if the policy is pooled, depending on the country, the coverage involved, and the
insurer and network used.
- Commissions: Paid to brokers in each country, where relevant.
- Local dividend payments: Made under insurance policies in each country, where
relevant.
- Funds Retained
- Additions to reserves: Occurs most often for obligations known in advance
(namely, retirement pensions), but also arises occasionally for some liabilities not known
in advance, e.g., disability annuities or incurred-but-not-reported (IBNR) claims under
coverages such as life or medical insurance.
- Balance
- Multinational dividend: Positive balances arising in countries where experience
has been favorable are used to offset negative balances in countries where experience has
been poor.
Multinational-pooling
accounts normally provide more information than may be available under local policies.
Types of Pooling
In some years in a second-stage account, a negative balance in one or two countries may be
offset by positive balances in other countries. But in other years, positive balances in
individual countries may not be sufficient to offset negative balances elsewhere,
resulting in an overall negative balance in the second-stage account. Depending on the
terms of the multinational pool, a negative balance can be handled in a variety of ways.
For larger accounts:
- Loss carry-forward: Under this arrangement, a negative balance at the
multinational level is recouped from future positive balances at that level, generated by
good claims experience in each country participating in the pool. Involving no special
charge to the parent company other than lost dividends, this arrangement is the most
common.
- Stop loss: Under this arrangement, a negative balance at the multinational
level is entirely or partly forgiven. Some multinational networks offer a form of rolling
stop-loss, that is, any deficit not recovered on a pre-set schedule (for example, after
three or five years) is forgiven. Stop-loss arrangements are subject to a charge, which is
one of the expense items in the second-stage account. This arrangement tends to be very
expensive.
- Loss free: Under this arrangement, a negative balance at the multinational
level is paid by the parent company to the network insurer. This is a very expensive
method of eliminating negative balances in the second-stage account.
Smaller accounts generally participate in a multinational pool along with other parent
companies of similar size, sometimes called a “small-groups pool.” A pooled
account is itself a form of protection. The overall multinational dividend in a
small-groups pool equals the second-stage margin, which is generally the total of positive
balances less any negative balances. Assume, for example, that, in a small-groups pool
consisting of ten employers, seven have positive balances in a given year and three have
negative balances. Barring any special arrangements, the second-stage margin of the
small-groups pool is the total of the seven positive balances less the total of the three
negative balances. That second-stage margin is then distributed according to the
network’s rules, which often take into account each employer’s proportional
contribution to it. Negative balances at the second-stage level are not carried forward.
Captives
Some networks may agree to reinsure part or all of the risk of a parent company’s
multinational pool to the parent’s captive insurance company. Reinsurance to
one’s own captive is cost-effective only for pools generating very high premium
volume. This is because the risk of paying one’s own losses (rather than transferring
them) must be outweighed by the cash-flow and investment benefits of collecting one’s
own premium and the reduction in cost achieved by having most of the expense charges paid
to the captive.
Risk Management
Effective risk management can be defined as handling the maximum amount of risk at the
least cost. In multinational pooling, although consistently large dividends are associated
intuitively with maximum cost reduction for a given amount of risk, the absence of such
dividends does not necessarily mean that an employer’s risk is not managed
effectively. For example, under a loss-carry-forward pool, dividends may be small or
nonexistent. However, if premiums for the parent company under that type of pool were as
close to pure risk premium as possible and if the price for that coverage/cost ratio, in
the form of small or nonexistent dividends, were acceptable, the pool would be managing
the parent’s risk effectively. Thus, dividends are just one factor affecting the
overall cost of risk.
Future of Multinational Pooling
Generally, the world’s insurance markets are moving toward less regulation, resulting
in more competitive local premium rates. This trend translates into fewer opportunities
for cost savings through multinational pooling. However, cost savings is not the only
reason to consider a pool. Multinational pooling provides services and information that
cannot be obtained locally, including global retirement plans (through cross-border
transfer of pension reserves), global medical plans (through ability to provide
uninterrupted coverage for internationally mobile employees), ease in obtaining coverage
outside the parent’s home country, and improved reporting.
These value-added advantages of multinational pooling assure it a continued place in
global business strategy.
| Contributors: |
Ann Leeds and Christopher Campbell, Hewitt
Associates LLC, Lincolnshire, Illinois, USA
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| Editor’s Note: |
For definitions of employee benefits terminology, see
the Employee Benefits, Healthcare, Human
Resources category in our Glossary Agent™.
|
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