If you have many operations across a number of territories there's a chance that by grouping your insurance contracts on a multinational basis you can help cut costs and even produce dividend returns, says David Rowley
Executive summary
• To set up a multinational pool employers need a sizeable workforce across two or more countries, where staff receive insured risk benefits including life insurance, income protection, health insurance and also death-in-service pension benefit for spouses. In some European countries this might include pension benefits too.
• For multinational employers, pooling operates by having either all, or most of, its insurance providers from around the globe enter into a contract. This is organised by one of around a dozen leading pooling networks (see box over).
• A service fee will be deducted by the organisation that runs the pool, but the dividend usually ranges from 1% to 15% of the total premium. This dividend can be paid back to any subsidiary that had a low claims rate, or it can be retained by the parent employer. This arrangement gives the employer a chance to participate in the profit normally taken by insurance companies.
• Other benefits include: improved cash flow, reduced expenses, access to information on plan design and funding, the potential for dividends and timely financial reporting.
• Using a multinational pool may not always offer the best or most flexible deal for employers because they have to place the business with the insurance firms that participate in that pool.
• If employers are deemed too small to establish their own pool, or their claims record is too volatile, they can enter a 'multi-pool'. All pooling networks run a multi-pool operation and these contain many different small contracts from many employers within the same pool.
Of the many strategies used by employers to reduce benefit costs , multinational pooling may be one of the most ingenious. And a double whammy is created by the fact that its complexities are largely shouldered by the providers of these schemes.
Pooling's origins date back to the late sixties, one of the first ever companies to set up a pooling arrangement with its insurers was US car giant Ford - it wanted an arrangement to cover its employees in Australia, Brazil, France, Mexico, South Africa, Switzerland and the UK - and its big purchasing power enabled it to strike an attractive deal that also sought to limit the profits of its insurers. The upshot was that other big multinationals followed suit and as pooling networks have spread, they have found ways to include smaller multinationals.
The main pre-requisite for pooling is having a sizeable population of people working across several countries who receive insured risk benefits including life insurance, income protection, health insurance and also death-in-service pension benefit for spouses. In some European countries this might include insured pension benefits too.
For multinational employers, pooling operates by having either all, or most of, its insurance providers from around the globe enter into a contract. This is organised by one of nearly a dozen major pooling networks, which may be an insurer themselves, or a specific organisation is set up to run pool arrangements. This contract says that beyond operational costs and claims made by the employer, any extra profit normally due to the insurers is paid back into the pool. One of the reasons this is acceptable to the insurers is that their potential losses are covered too. An insurer could explain a typical scenario as follows: 'If you were paid £1m, of which £200,000 was your margin, but you had paid out £600,000 in claims, you have made a £200,000 profit. That profit goes back into the pool. However, if there had been £1.1m of claims the insurer gets their losses back, if the pool as a whole made a profit.'
This is a perplexing arrangement that might seem too good to be true for the employer, but for the local insurer there are many advantages - of which more will be explained later.
For the employer meanwhile, there is the chance to claw back a dividend if the pool as a whole has made a profit over the year. A service fee will be deducted by the organisation that runs the pool, but the dividend usually ranges from 1% to 15% of the total premium. This dividend can be paid back to any subsidiary that had a low claims rate, or it can be retained by the parent employer.
Claims greater than the premium value
In effect, the arrangement gives the employer a chance to participate in the profit normally taken by insurance companies. The size of the dividend will very much depend upon the territories the pool covers. In countries such as the US and Britain, the insurance market is very competitive and the profit margins are low, so here the margin for profit/dividend will be low, elsewhere (for example, Poland, New Zealand and Japan) it can be much higher.
Another advantage of the arrangement is that if all the subsidiary companies, or foreign branches, covered by the pool make claims greater than the premium value, the employer is not charged this excess. The loss is merely carried over to the next year and deducted from any profits.
Many insurance providers agree to participate in pools not only for the chance to work with big name clients, but also because of the opportunities that are passed on as new employers apply to join the pooling network and as multinationals expand through acquisition. A situation some describe as being like a 'gentleman's club'.
Tim Slee, head of global sales at Bupa International, says: "Pools can bring opportunities to an insurance company. If you are part of a pooling arrangement, all the member insurance companies share information regarding the pooled companies and it makes sense for clients to keep their various insurances within the participating companies."
Beyond cheaper insurance, employers get many other perks besides. Ford cites improved cash flow, reduced expenses, access to information on plan design and funding, the potential for dividends and timely financial reporting. Indeed the IGP network that Ford belongs to offers daily online reports on the status of each client's pool. These reports can highlight excessive claims in certain territories alerting the head office of any looming staff problems at subsidiaries. Pharmaceutical giant Pfizer, another user of pooling, cites better management of risk among its key advantages of using pooling techniques.
Insurance outside a pool
The long list of attractions means that employers that can gain access to a multinational pool network are often in a much cosier position than those who are paying for insurance outside a pool. This means they are likely to stick around longer and can save an insurer significant costs.
Alan Thacker, senior consultant at Buck Consultants and formerly of multi-pooling network Generali, says: "The insurer will get lower margins, but that can be offset if it has lower operating costs due to the business staying longer.
"They are also getting a more stable underwriting result because effectively what they are doing is saying: 'If we have individual contracts in three different countries, one may look an unattractive risk because it has gone into a loss, but if you pool it with the other two or three contracts the underwriting result will be more stable and it will look more attractive as a risk to the insurer'."
Scope for free cover
The sheer size of an insurance pool tends to generate scope for extras like a small amount of free cover wherever it is needed. Jim O'Driscoll at Canada Life says that this free cover could be allocated to top-up insurance cover for employees in countries where it is not the culture to get the multiples of cover we get in the UK.
The size of the pooling contract will also give leverage in adding small groups of employees in new offices that were not part of the original pool. Thacker says: "The pooling network may be a useful source of support for small start-up operations - such as, sales and marketing operations - where it may be more difficult to establish group contracts without the associated risks included in the pool. Transferring employees internationally within the organisation is also easier to facilitate on favourable underwriting terms if the insurance contracts of both countries are included in the pool."
Some insurers do have their limits. Typical of these are that Bupa will not agree to putting a contract in a pool that is not experience rated, particularly for small head counts, while Generali, which runs its own pooling network, will not accept a pool for less than 100 lives.
One insurer that did not want to be named also outlined some of its unease about multinational pools. "It is an awful lot of work and it is fairly complex for the insurer. You have got obligations to the pooling organisation and if you are in a multi-pool you have obligations to your partners."
The insurer also questioned the value an employer gets from an insurer 'reducing' their margins. "Insurance companies are obliged not to write loss making business. So this means that sometimes the best price in the market is not always one that has international pooling involved."
Using a multinational pool may not always offer the best or most flexible deal for an employer. Thacker says: "You have to place the business with the insurers that participate in that pool."
"If your [current insurance] contracts do not happen to be with [the insurance firms within] that network you might have all sorts of reasons why it is undesirable to change them or impossible to change them. You might have local guarantees where the contracts in some European countries are in place for several years. Or you may have profit shares with your contract too which you would lose."
Another potential minefield is who gets the dividend payments. "Works Councils need to be brought into the equation too. They may have a right or desire to share in this," says Thacker.
Interestingly GlaxoSmithKline currently allocates its dividends in full on a pro rata basis to all participating subsidiaries posting a positive contribution to overall surplus results in the pool in any given year. The drugs firm is calculated to have saved in excess of £7.7m over the last 20 years from pooling (its 26 country pool is run by Insurope), only in one of those years has it produced a deficit. Employers need a critical mass for insurers to consider them for their own pool. If they are deemed too small - or their claims record is too volatile they can enter what are confusingly known as multi-pools. All pooling networks run a multi-pool operation and these contain many different small contracts from many employers within the same pool.
Positive surpluses
The dividend pay out system for small pools differs slightly to a bigger employer having their own pool. Within the IGP network, if the employer's own experience is positive, and the overall experience of the pool is positive, it receives a dividend, less a pro rata share of deficits that arose elsewhere in the small groups' pool. In 2006 IGP small pool group returned 21%.
For the Insurope small pool network an employer can get a dividend payout for an operation that has no claims in one country, even if its other operations' claims results are high.
Malcolm Penny, regional director for UK and Ireland, Insurope, says that his network has had only two negative overall results in the last 23 years and that dividends (after losses and administration charges) have been paid out for 35% of all positive surpluses.
Case study: Unilever
Bigger size assets often means that there are greater investment services available to a pension fund. One of the ways Unilever is helping pension funds of its subsidiary and foreign operations gain this economy of scale is through a pooled pension fund dubbed Univest.
The two biggest pension funds in the Unilever group, the UK and Dutch funds, have seeded the Luxembourg-based Univest with over £1bn each and invited smaller pension funds in the group to join up. Launched in December 2005 Univest has subsequently appointed some of the best in class investment managers going and also appointed a hedge fund manager early last year - something many small pension funds struggle to gain access to due to insufficient fund sizes.
The fund has another advantage in that it is set up as a transparent fund known as an FCP (Fonds Commun de Placement) which means its investments are not subject to withholding tax in the countries where it has equity investments.
The fund was created using the investment knowledge of Mercer Investment Consulting, Goldman Sachs and Northern Trust Corporation.
Aaron Overy, Northern Trust vice president and business development for pooling, explains the tax efficiency of the fund: "If you are UK pension plan investing in US securities you can have nil rate withholding tax. As soon as you go into a mutual fund, the withholding treaty between the fund and the US takes place, and you will pay 15% withholding tax. With an FCP the US revenue can look through the fund to the underlying investors and see that there is a UK pension plan and Dutch pension plan." Of course tax savings are not the only advantage. Having one fund saves appointing 10 different custodians, auditors, consultants and differing sets of investment managers for each regional fund.
Philip Lambert, Unilever's head of corporate pensions, says the initiative will "improve the consistency in quality of asset management, [produce] lower overall risk and allow us to better leverage our economies of scale".
