How multinational pooling of insured risk benefits can deliver savings

Multinational pooling of insured risk benefits can bring savings for employers, but due diligence is essential to make sure all insurers in the network are financially stable, says Amanda Wilkinson

Multinational pooling, the mechanism whereby employers are effectively offered a profit share in their expenditure on insured risk benefits across multiple locations, is known for its complexity. But in these cash-strapped times, getting to grips with multinational pooling of insured risk benefits such as life assurance, income protection, critical illness cover, private medical insurance and death-in-service pensions could help international employers make long-term savings. Alan Thacker, a senior consultant at Buck Consultants, says: “There are margins in contracts, particularly in tough economic times, that employers should look to take advantage of.”

In simple terms, multinational pooling effectively aggregates the risk from insurance contracts in different countries so that a bigger population is created. This provides a more stable insurance result, partly because of a smoother claims experience. There is, effectively, a levelling out of insurers’ profit margins of between 20-30% on premiums for small, but high-risk contracts of about 100 lives, and 1-5% for large, low-risk contracts of thousands of lives. At the end of the year, the network adds together costs incurred at a local level, such as commission paid to advisers and claims paid out, and those incurred centrally, such as administration costs, and deducts this figure from the total amount paid in premiums. If there is a positive balance left, which could happen if there have been few or no claims across the pool, this will be shared with the employer, which may pocket it centrally, share it among its subsidiaries as an incentive for them to take part in the pool, or put it into a country where it is tax efficient to do so.

But the complexities do not end there. The networks may insist on some risks being excluded or reinsured against at an extra cost to the pool. Employers will have to work out which countries should be included in the pool, depending on the claims experience and the margins on contracts for individual countries. They must also consider what type of network to use – an integrated network of mostly wholly-owned insurance companies, as is operated by AIG and Generali, or a non-integrated network of affiliated insurance companies, as provided by Insurope and IGP.

The recent banking crisis, which saw the near collapse of AIG due to its exposure on protection insurance for investors in subprime mortgages, has given employers food for thought. Dieter Gistelinck, European regional manager at Willis Multinational Benefits Practice, says: “Employers should carry out a thorough due diligence to find out [which] are the ultimate parent companies behind their pooling arrangements that guarantee financial stability, claims payment and reserve settings, and establish a correct assessment of the ranking of the local fronting insurance companies networks are using, including the reinsurance in place.

“For integrated networks, like Generali and AIG, this due diligence can be rather simple as it will relate directly to the ultimate underlying financial stability of the parent group, but it can be much more complicated in the case of non-owned networks or where fully-integrated networks use partners.”

AIG, following its rescue by a cash injection from the US government, has sent customers letters of reassurance. A company spokeswoman says: “Regardless of which country we are in, we are required by the regulators to maintain a capital surplus to ensure we can meet policyholder obligations. All AIG insurance companies remain well capitalised, strong and financially sound.”

There is also some comfort for employers in non-integrated networks as partners are selected for their expertise as well as financial viability, says Marion Ware, head of marketing at Canada Life, which is one of the affiliates used by IGP and Insurope in the UK. “What we find in our pools is they try to take the number one or number two in the market in a particular segment.”

Malcolm Penny, regional director for the UK and Ireland at Insurope, adds: “We carry out exhaustive due diligence on our companies or any company before it joins the network, irrespective of how large they are. Going for the number one or two is not necessarily any guarantee that they are financially sound.”

However, the economic turmoil may result in a spate of ownership changes, which employers must keep on top of. Paolo Marini, director of sales and marketing communication for Generali’s employee benefits network globally, says: “It is possible that in the next 12 months there will be quite a few mergers and acquisitions in the financial services sector.”†

If you read nothing else, read this…

In tough economic times, multinational employers can make savings in the long term on risk benefits, such as life assurance, by entering into a multinational pooling network.

Multinational pooling aggregates the risk from insurance contracts entered into in different countries, so that a bigger population is created, providing a more stable insurance result and potential savings for employers.

Employers should carry out due diligence to ensure the insurance companies in the network are financially stable.