26th March 2018

Multinational Pooling Advanced

Our last CPD edition looked at some of the high level concepts behind multinational pooling, including the history and background, an overview of the common models and benefits for corporations, advisers and insurers. This article will look at some practical examples to illustrate the models and the advantages and disadvantages of some of the alternatives.

As a reminder, multinational pooling is a structure which links insured employee benefit plans worldwide for multinational corporations. It is used as a financial vehicle by employee benefits managers and risk managers worldwide to reduce the escalating costs of insurance, and to coordinate employee benefit plans within their organisations.

The reasons that a corporation will use pooling are primarily financial. These are:

• Cost savings and efficiencies from economies of scale
• Possible international dividend

These benefits will be greatest if policies in uncompetitive markets or policies for smaller groups where experience may not affect the premium are included. The savings may not come in the form of a dividend. Some pools are actively managed to be break-even, with savings being generated by obtaining good local prices combined with managing design of local policies.

Other benefits that may be obtained are:

• Improved local contract terms such as Free Cover Levels
• Easier transfer of employees between countries
• Improved management and control over global employee benefits
• Access to information on benefits and claims of subsidiaries
• Influence with networks and hence local insurers
• Single point of contact for international information or issues

Information on health and wellbeing can be particularly valuable, as patterns of claims can be analysed and appropriate action taken.

Over recent years the gradual opening up of many markets to competition has reduced the size of international dividends, so the other benefits or pooling are gaining a higher profile. The flow of information is now seen as almost important as the financial advantages.

Operation of Multinational Pooling

In a multinational pooling arrangement, the local scheme will run as normal during the year, with premiums and claims being paid locally. At the end of the year, the pooling partner will request details of premiums and claims paid, reserves being held, etc. All local results will then be collated into a client’s pooling report with retrospective experience rating applied to give an overall result, often known as “second stage accounting”.

This calculates the amount due from the local insurer back to the pooling partner (surplus of premiums less claims paid and administrative and risk charges). If a local insurer has incurred losses due to poor claims experience, they can be compensated from the pool where surpluses have been made in other countries in the pool, although this depends on the agreement and any reinsurance arrangements in place.

Types of pool

The traditional pool contains subsidiaries of a single Multinational Corporation (MNC).  Where there is a profit it will be paid to the MNC, after the reimbursement of insurers that had made a local loss. These payments are usually known as dividends. The payment is due to the parent company, although about two-thirds of MNCs will distribute some or all of the dividends to participating subsidiaries.

Example 1 shows how this may work.

Example 1	A typical profitable year
	Country A	Country B	Country C			Overall
Premium	100,000	100,000	100,000			300,000
Claims	0	-50,000	-165,000		-215,000
Admin/Risk	-5,000	-5,000	-5,000		-15,000
Remainder	95,000	45,000	-70,000			70,000
To cover losses	47,500	22,500	-70,000			0
To MNC	47,500	22,500	0			70,000

 

The differences between pool types come when there is an overall loss.

Loss Carry Forward

The original pools were run on a loss carry forward basis. The loss would be a starting point for the next year’s accounts. Any profits in the next year would first be offset against the loss, and any remainder would be paid as a dividend. The loss can be carried forward for a number of years, until it is cleared or the pool is cancelled.

As the pool could be cancelled with a loss to insurers and the network, risk charges are applied.

Examples 2 and 2a show how this may be done. Networks may take a different approach to allocating the loss between countries but the overall results will be very similar. In practice there will also be interest charged on the transactions.

Example 2	A  loss year
	Country A	Country B	Country C		Overall
Premium	100,000	100,000	100,000		300,000
Claims	90,000	50,000	165,000		215,000
Admin/Risk	-5,000	-5,000	-5,000		-15,000
Remainder	5,000	45,000	-70,000		-20,000
To Cover losses	5,000	45,000	-50,000		0
To MNC	0	0	0		-20,000
Example 2a	The following year under loss carry forward
	Country A	Country B	Country C		Overall
Premium	100,000	100,000	10,0000		300,000
Claims	-165,000	-50,000	0		-215,000
Admin/Risk	-5,000	-5,000	-5,000		-15,000
Balance from previous year	0	0	-20,000		-20,000
Remainder	-70,000	45,000	75,000		50,000
To Cover losses	-70,000	26,250	43,750		0
To MNC	0	18,750	31,250		50,000

It would be possible that there is a very large loss, say a claim for €1,000,000 under a scheme. There are two ways that the multinational pool can protect the MNC against such a loss. One is to limit the size of any individual claim and leaving that risk with the insurer. This could lead to a further accounting entry for non-pooled premium.

Example 3	With a pooling limit
	Country A	Country B	Country C			Overall
Premium	100,000	100,000	100,000		300,000
Non -pooled premium	-10,000	-10,000	-10,000		-30,000
Pooled Claims	-500,000	0	0		-500,000
Non-pooled Claim	500,000	0	0		500,000
Admin	-5,000	-5,000	-5,000		-15,000
Remainder	-415,000	85,000	85,000		-245000
To Cover losses	-170,000	85,000	85,000			0
To MNC	-245,000	0	0		-245,000

 

This could still leave a loss that might take some time to clear. Therefore the basic model has been developed with a variety of methods for cancelling losses after an agreed amount of time and to provide for the sharing some dividends even if there is a loss being carried forward.

Other variations exist with cash flow tools to advance dividend payments or to retain profits in reserves to protect against future losses. These options all change the risk charges needed.

Stop Loss

Some MNCs do not want to be in the position of having a loss in their name, which may limit future returns from the pool. One option is to have a stop loss agreement that will write off any loss for the MNC, with the loss taken by the insurers in the network. When the pool makes a profit a dividend will still be paid. There is more risk to the insurers from this arrangement, so risk charges will be higher and potential returns to the MNC lower.

Some pools are now run with the intention of broadly breaking even over a three to four year cycle. The additional risk charges therefore represent a proportionally larger part of any prospective dividend and pool managers are less keen on an annual stop loss applying to any size deficit.

Multi-employer pools

The traditional pooling arrangements work well for pools with many contracts and a significant number of lives. Smaller pools can be more volatile with a number of years of good experience, quite possibly claim-free, giving high profits. However, if there is a poor year for claims then the loss could be substantially more than the annual premiums being received.

A very large loss would be a bad result for the MNC. If they were operating on a loss carry forward basis as it could be a few years before they get a return. This would be an even worse result for the insurers in the pooling network as it would be likely that the pool would be cancelled, just leaving the loss. For both loss carry forward and stop loss the risk of a single loss year is too great to justify running small pools.

A multi-employer pool is the solution offered. In this case, all smaller pools are combined in a single pool. The profits and losses are measured across all pools. Any MNCs loss would be covered as with a stop loss arrangement. If there is a profit, then a partial payment will be made dependant on the overall pool results.

Whenever the result of the multi-employer pool breaks even or better, the pooling mechanisms ensure that local insurers will cover their losses. This is an important protection for the insurers.

There are technical differences between networks in the way the pool allocates dividends but most networks offer a variation of this type of pool. Size is an important factor; a bigger pool is more stable and will be less likely to make big payments, but also less likely to have a loss with no dividend.

Inclusion within a multi-employer pool is primarily decided by the size of the participating pool rather than the size of the MNC. The volatility comes from the low number of lives insured. The networks present the multi-employer pool as a stepping stone towards a stand-alone pool. The returns for an MNC that has low claims will then be greater, as there is no deduction for other companies’ losses. Therefore the usual aim is to grow the number of subsidiaries included so that the MNC can have a pool that can operate by itself.

Alternatives to pooling

Self-insurance and Captives

The main competition to pools comes in the form of self-insurance. The companies involved are large and many will take on their own Property and Casualty risks, including Building Insurance, Fleet Insurance and Liability Insurance. Compared to the potential claims for those products, employee benefits risks are small.

This form of self-insurance is often operated through a captive insurer, and when this happens pooling networks can still get some benefit by acting as an administrator. The advantage a local insurer brings with regard to appropriate product designs have been noted, and there is a demand for insurers to take the risk and reinsure to the captive insurer.

Pooling networks can make this process easier by eliminating the need for each local insurer to have a bespoke agreement with each captive. The insurer can have a reinsurance agreement with the pool and the pool has a further reinsurance (retrocession) agreement with the captive insurer. This solution relies upon the pooling network having an appropriate structure.

There are two levels of engagement. For some clients the risk is still operated on a retrospective pooling basis, but if there is a loss this is picked up by the captive insurer.

The next level is a premium transfer arrangement, where premiums are passed to the reinsurer and then captive when paid, and claims are collected. This has a greater administrative overhead and often requires some higher pooling limits.

Within the context of a formal multinational benefits programme, captives are only used by a small proportion of multinational companies. The best estimates are that there are less than 100 captives that include employee benefits worldwide, centring around about 70 to 80.

Local markets

The other competition to pools comes from local market conditions. The benefits of using a local insurer that is not participating in a pool could be from price competitiveness and service, the processes of local markets and advisers, or the availability of generous profit sharing.

It is when there is local competition that pooling can be effective in improving persistency. If an MNC has control over its subsidiaries, the parent company may ask the local subsidiary to place the business with the local insurer who is part of the appropriate network. It is for this reason that pooling networks are keen to understand the influence that the parent has over the subsidiary. This control is more effective if the multinational parent shares some or all of any international dividend with the local companies.

The local factor that can be most influenced by pooling is price. A policy underwritten with a suitable margin is also good for the MNC. It is more difficult to persuade a local company to place business with an insurer that offers poor service and terms and conditions that do not meet the local market standards.

Pan-national plans

Some of these advantages of pooling could be obtained by using a pan-national insurance plan. This is a common approach in Property and Casualty Insurance, where a single insurance policy can be written to cover every building a company owns worldwide.

The market for such plans is very limited for employee benefits with only a few plans available; often those plans are restricted in geographical coverage. Primarily this is because local insurers offer products designed to fit with the regulations and tax regimes of their countries.

Paul Avis, Marketing Director, Canada Life Group Insurance

 

 

 

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