Multinational pooling networks report strong growth from companies trying to save money, with experts pointing to benefit consistency, cost savings, richer offerings and management information as key motivators.
While it soon becomes clear to an employer whether they should opt for a multinational pooling arrangement, intermediaries can add value by determining the types of arrangement and network used.
Growth in the sector has been significant in recent years. Insurope, for example, reports a 16 per cent average annual compound growth rate in its pools over the past five years.
Multinational pooling enables organisations with group risk schemes in at least two countries to spread risk and benefit from favourable claims experience by receiving a year-end dividend. They can also enjoy premium discounts by leveraging their international presence via economies of scale.
Also of rapidly growing importance is the ability to provide data to help implement a consistent, transparent global benefits strategy and enable flexible underwriting that can lead to benefit enhancements and more generous free-cover limits.
Canada Life Group Insurance marketing director Paul Avis says: “Traditionally, pooling has been seen as a financial benefit, but there are new drivers. Chief risk officers of multi-nationals want oversight, management information and control over global
risk management.
“Global HR teams also want to set up multinational benefits and health and wellbeing strategies and to collate management information to target specific health challenges.”
The right network
Intermediaries who have come to the conclusion that multinational pooling is a ‘no-brainer’ for their client still need to add value by selecting the right pooling network.
One choice that has to be made is between providers such as Generali, Maxis and Zurich, which own their networks, and those like IGP, Insurope and Swiss Life, which form partnerships with local providers.
The Generali EB Network has just launched a pooling product for the international middle market, called Multiplan. Generali is allowing participation from the inception of a single UK GLA or GIP contract with the provider.
Other significant differences to be borne in mind are that some networks reinsure all their contracts while others reinsure selectively, and that some pay out 100 per cent of the international dividend but others hold back a percentage to form part of their reserves.
JLT Employee Benefits international benefits director Lee Thurston says: “Owned networks may feel they have more control over terms, conditions and pricing and that these could be more in the hands of local partners with multi-partner networks. But, conversely, the multi-partner networks could argue that they choose the best partners in each country.
Whichever network is selected, it is important to appreciate that significantly different returns can result from the choice of risk mechanism structure and from being in
different countries. These factors have been well highlighted by Towers Watson’s Multinational Pooling and Benefit Captives Research Report published this March (see tables).
Pooling networks offer three types of risk mechanism: loss carry-forward, stop loss or small group multi-employer pools. The Towers Watson study shows the last of these to have produced by far the lowest average dividend yield, of 1.6 per cent, although some commentators believe that the fact that the survey was carried out over only a three-year period could distort the picture.
Swiss Life head of corporate clients, Luxembourg, Theo Iaponas says: “Typically, smaller pools have a much better diversification of risk but the charges are higher and there are fewer economies of scale. But it’s still not clear if the differential in dividend with the other types of risk mechanism would be so large over a longer period, so further long-term research is needed.”
However, multi-employer pools should be viewed only as incubator-type arrangements for companies with fewer than 1,000 lives that are not big enough to have their own pool with either a stop loss or loss carry-forward arrangement.
Zurich Employee Benefits Network customer relationships manager Dale Fleet says: “Small multi-pools can have high turnovers and fluctuations in results as good and bad contracts leave and join the pool. The objective of any company should be to be in the small group pool for only a short time and to have its own pool.”
But intermediaries looking to transfer clients to their own pools should ensure they first do due diligence on the claims experience of the contracts because those doing badly could be better off in a multi-pool where they are effectively cross-subsidised by other companies.
The choice between stop loss and loss carry-forward arrangements can be far less clear cut. With loss carry-forward, any deficit at the end of the year is carried forward to the next year and this could result in having to go without a dividend for several years. With a stop loss arrangement, on the other hand, a scheme can be without a dividend for only a single year.
Stop loss arrangements involve additional cost but, according to the Towers Watson survey, the average dividend at 6.2 per cent lags only slightly behind that of loss carry-forward arrangements, which have seen dividends of 6.7 per cent.
The stop loss approach can be most suitable to the smaller and more volatile schemes – particularly those with heavy exposures to one or two countries – while loss carry-forward can be best for organisations that actively manage their pools.
But most experts acknowledge that the choice normally boils down to individual preferences and attitudes to risk. Furthermore, although some schemes are 100 per cent stop loss or loss carry-forward, there are many in the middle that use a combination of both.
Varying profitability
Profitability of pooled business can vary between countries. At one end of the scale, Indonesia returned 36 per cent on all pooled premiums paid, while at the other end Hungary returned minus 36 per cent.
Towers Watson director of international consulting services Roger Beech says: “Organisations in the better- or worse-performing countries should consider these results before deciding whether to have them in a pool. But, although this research can provide a good benchmark, companies must ensure they look at their own claims experience as it could be different.”
But this is only one aspect of effective scheme management. Irrespective of which network has been chosen, the degree of central control exercised by a client company can be very significant.
Fleet says: “Some companies have a lot of control over what local subsidiaries are doing. They may have a central benefits inventory giving them information about all their subsidiaries and not just those in the pool.”
The larger multinational employers also need to consider whether to go a stage further than a standard multinational pooling arrangement and set up their own captive insurer. This can still pay a dividend but involves taking a greater degree of risk. Although interest in captives is limited to a clear minority, it is increasing rapidly. JLT Employee Benefits estimates that around 50 per cent of its multinationals use pooling but only around 5 per cent use captives. But it expects this proportion to double to 10 per cent in the next two years.
Iaponas says: “Captives are for a specific type of client that is quite a sizeable company with proper risk management controls, and they are positive in the sense they put more pressure on keeping costs low to begin with. But it is important not to automatically conclude that captives offer more than networks.
“For example, networks have the ability to hand out local profit sharing and we would be interested to learn about what capital inefficiencies exist within some of the captive structures and how Solvency 11 would affect these structures, especially the small to medium-sized ones.”
