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.
Earlier this month, a previous CPD published by FTAdviser on multi-national pooling 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, 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 less competitive 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.