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). Â 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 | Â | Â |
| Â | Â | Â | Â | Â | Â |
| Â | Country A | Country B | Country C | Â | Overall |
Premium | 100,000 | 100,000 | 100,000 | Â | 300,000 |
Claims | 0 | -50,000 | -165,000 | Â | -215,000 |
Admin/Risk | -5,000 | -5,000 | -5,000 | Â | -15,000 |
Remainder | 95,000 | 45,000 | -70,000 | Â | 70,000 |
| Â | Â | Â | Â | Â | Â |
To cover losses | 47,500 | 22,500 | -70,000 | Â | 0 |
To MNC | 47,500 | 22,500 | 0 | Â | 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 Â loss year | Â | Â | Â |
| Â | Â | Â | Â | Â | Â |
| Â | Country A | Country B | Country C | Â | Overall |
Premium | 100,000 | 100,000 | 100,000 | Â | 300,000 |
Claims | 90,000 | 50,000 | 165,000 | Â | 215,000 |
Admin/Risk | -5,000 | -5,000 | -5,000 | Â | -15,000 |
Remainder | 5,000 | 45,000 | -70,000 | Â | -20,000 |
| Â | Â | Â | Â | Â | Â |
To Cover losses | 5,000 | 45,000 | -50,000 | Â | 0 |
To MNC | 0 | 0 | 0 | Â | -20,000 |
| Â | Â | Â | Â | Â | Â |
Example 2a | The following year under loss carry forward | Â |
| Â | Â | Â | Â | Â | Â |
| Â | Country A | Country B | Country C | Â | Overall |
Premium | 100,000 | 100,000 | 10,0000 | Â | 300,000 |
Claims | -165,000 | -50,000 | 0 | Â | -215,000 |
Admin/Risk | -5,000 | -5,000 | -5,000 | Â | -15,000 |
Balance from previous year | 0 | 0 | -20,000 | Â | -20,000 |
Remainder | -70,000 | 45,000 | 75,000 | Â | 50,000 |
| Â | Â | Â | Â | Â | Â |
To Cover losses | -70,000 | 26,250 | 43,750 | Â | 0 |
To MNC | 0 | 18,750 | 31,250 | Â | 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 | Â | Â | Â |
| Â | Â | Â | Â | Â | Â |
| Â | Country A | Country B | Country C | Â | Overall |
Premium | 100,000 | 100,000 | 100,000 | Â | 300,000 |
Non-pooled premium | -10,000 | -10,000 | -10,000 | Â | -30,000 |
Pooled Claims | -500,000 | 0 | 0 | Â | -500,000 |
Non-pooled Claim | 500,000 | 0 | 0 | Â | 500,000 |
Admin | -5,000 | -5,000 | -5,000 | Â | -15,000 |
Remainder | -415,000 | 85,000 | 85,000 | Â | -245000 |
| Â | Â | Â | Â | Â | Â |
To Cover losses | -170,000 | 85,000 | 85,000 | Â | 0 |
To MNC | -245,000 | 0 | 0 | Â | -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
