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Multinational pooling revisited

What can be said (or written) about multinational pooling that has not been said already? What trends can we see today that have not occurred at some point in the past? The answer to these questions is probably not much and not many!

Yes, the awareness of pooling by multinational organisations and the extent to which pooling is being used by them has increased worldwide. Yes, captives are gaining interest again and many multinationals are investigating the possibility of running either part or all of their employee benefit risk and/or premium through their captives. These are not necessarily new ideas. However in this article, we discuss how an organisation can obtain greater efficiency and cost-effectiveness from taking a more pro-active role with regard to pooling.

Back to basics

In essence, multinational pooling is a technique that allows organisations with multiple operations around the world to consolidate their employee benefit insurance contracts in these countries with a local insurer of an international insurance network. Principal among the merits multinational pooling can offer are:

• economies of scale and purchasing power
• global experience rating
• financial cost savings
• improved underwriting terms and conditions
• annual reporting
• a management tool and information base.

Though many benefits professionals know and understand the advantages of pooling, they seldom realise its full potential. What can an organisation do to ensure that it optimises the advantages of multinational pooling and manages the arrangements in place in the most effective manner?

Active management

The answer lies in actively managing the pools and making them part of the overall international benefits function. It is a seemingly simple answer. We set out below four steps to help put this into practice.

The first vital step is to develop a policy and some practical guidelines on how to use pooling and how pooling fits in with your company's HR and business strategies. For example:

• Business strategy/structure - Is your organisation's business strategy based more on a centralised model or decentralised model? What is the relationship and structure of the corporate functions and the business units?
• HR infrastructure - Do you have HR professionals in all your locations worldwide? Also, what level of employee benefits experience do you have in these locations? Does the HR function fall under the corporate umbrella or are there separate HR organisations within each business unit?

It is in every company's best interests to ask itself these questions (and many more) before embarking on any pooling exercise, as the responses will help establish realistic expectations, determine the resources needed and the time horizon within which objectives can be accomplished.

The guidelines should provide direction to corporate, regional, and local managers with employee benefits responsibility. This will allow all those who will be affected and involved with employee benefits to work towards the same objectives. The more clarity that is provided, the more effective the implementation of any policy will be.

Remember, also, to set the ultimate objectives. For instance, do you as an organisation want to:

• Reduce upfront premiums and costs of local insurance contracts?
• Maximise international dividends to fund other 'global' programs?
• Secure better underwriting terms locally?
• Obtain a baseline of information?

Once these questions have been answered and goals identified, the next step of developing an appropriate infrastructure is one that is often overlooked or, at most, done in a very ad-hoc manner. However, it is a very important stage in the process because, if done properly, here is where a company can build the structure that will allow it to maximise future returns. A suggested approach is:

• Corporate/headquarters management – It is essential that someone takes ownership of any pooling initiative. Therefore, it is advisable to obtain support from senior management at headquarters in order to have the proper backing and to give the occasional push to move things along.
• Local/regional management – Communicate the concept of multinational pooling and its objectives to local and regional benefits and HR management to win their co-operation and input from day one. By engaging these people from the outset, there is the added advantage of getting their input and insight into potential problems that people at the centre may only come to realise when it is too late.
• Insurance network(s) – Build a partnership with your pooling networks to ensure they are helping you to maximise your financial gains and are giving you timely information. Insurers are a great source of data and are often aware of local country issues before you are. They can also provide a historical perspective that you may not have been aware of and a link to that history that could prove to be very useful.
• Consultant/advisors – Consider an advisor who can provide you with independent, objective information and 'double check' local issues.

Having laid the foundations, it is essential to continuously monitor progress, otherwise all that initial hard work will have gone to waste. We do not live in a static world, any structure put in place can only be expected to remain effective over time if it is capable of adapting as changes occur. Some ways to do this are:

• Understand your pooling contract and how the accounting operates. Make sure you are clear on the type of retention mechanism in place and how it works (for instance, stop loss, loss carry forward), as well as the dividend payout schedule for instance, 100% annually, 50% first year, etc). Also, will the network charge you an additional retention to reconcile run-out claims if you cancel your pool?
• Try to obtain interim status reports from your network(s) before the final pooling report is delivered so you can monitor claims experience. This is not always possible; some networks have this facility in place, others do not. As the rapid expansion of e-commerce and internet capabilities continues, it will become more commonplace for the networks to be in a position to provide your specific company pooling data on-line so that you can view it whenever you like.
• Analyse the year-end reports; hold insurance networks accountable for accurate, reliable and timely data. It will help you understand why there has been deficit in any particular country. The year-end reports provide you with a great opportunity to examine your current pooling arrangements and restructure them if need be. For example, contracts that are continuously running deficits should be looked at closely and considered for removal or put into a stop-loss pool.
• Gather data on benefit plans for countries or business units that are not currently included in your pools. Analyse insured plans to determine whether they should be pooled or whether there is a more appropriate local funding vehicle. Develop a database of information on the non-pooled countries and monitor them for future pooling consideration.
• Examine cash flow options and be aware of financial improvements to pooling arrangements (such as, release of reserves, prospective rate reductions, increasing pooling limits, alternative reinsurance arrangements), especially as the premium and number of persons insured in the pools increase. Again, if you are aware of what is occurring in each country, when your business expands you will be better positioned to take advantage of these opportunities and further enhance your potential cost savings.

The final step, but one whose importance should not be underestimated, is to make certain you get involved at an early stage in any acquisitions and constantly have in mind any opportunities created by organic growth. Mergers and acquisitions typically require a lot of work to be done in a short period of time. When a strong foundation has been established and a close relationship with the pooling network(s) exists, the process of integrating new employees into existing benefit arrangements is often made much less painful and it is easier to rapidly implement new arrangements if this is necessary.

Once you have done all the initial work, it will be easier to be involved on a local basis going forward. Therefore, play a role in the local renewal process by:

• Working with local management to leverage your company's global purchasing power with the pooling network to obtain even more competitive rates or better terms and conditions for the local insured plans.
• Review past claims experience (every two or three years if possible) of the insurance contracts being considered for pooling, to determine whether the contracts are a good risk for pooling.
• Consider transferring from insured to trusteed funding vehicles or, at least, ratchet up the type of insured vehicle chosen (for example, from deferred annuities to deposit administration).

Conclusion

This has been a rapid tour of the ways multinationals can make more effective use of pooling in today's world. But today's world is changing, driven primarily by the opportunities and technological advances associated with the burgeoning growth of the internet. In all probability, multinational pooling will be revolutionised by the availability of these new tools. We are already starting to see insurance companies moving away from their accepted distribution channels and communicating directly with their clients using secure web sites. Also, employers are enthusiastically embracing the interactivity that web techniques offer in tailoring their employment packages to individual employees' circumstances. It takes a very small leap of the imagination to envisage insurance providers and employees 'pooling' their capabilities in the area of multinational pooling, but this is a story for another day.

In this article, we have described some of the more immediate ways to manage multinational pooling. The process is not overly complicated. In fact, the formula is basic. However, it does take time to develop the infrastructure and to monitor progress. Like any other successful venture, careful planning at the beginning pays huge dividends in the long run. Done properly, pooling is a highly effective financial management tool that will help you develop a foundation to manage your global employee benefit programs.

Diary date: International discussion group

There will be an opportunity to explore in greater depth the issues raised in the article above at an international discussion group that Watson Wyatt is holding in London on 1 December 2000.