Whether it’s life insurance, medical insurance, or income protection, the majority of employee benefits packages today include some form of insured benefit as a way of providing protection to an employee or their family when needed. But providing these benefits isn’t without cost for the employer and for a multinational company, the costs can be high. That’s where benefits pooling comes in use.
Global companies with subsidiaries in different countries typically place their insurance contracts locally, with separate insurers. Under this set-up, risk is covered on a local basis, under contracts that include varying terms. This is often necessary due to insurance, tax, and social security regulations.
Multinational pooling is a tool that allows companies to spread their risk on a global basis, while still using the country-by-country plan setup. Under a pooling structure, the performance of individual contracts in different geographies are consolidated into a single account (the pool), with the result assessed on a global basis.
When the income items in the account (i.e. premiums paid) exceed outgo (including claims paid, changes in reserves, administration charges, commissions etc.) the account may be eligible for a rebate, in the form of an international dividend.
To participate in a pool, companies need to be insured by the local affiliates of a global insurance network.
There are eight networks that provide pooling services. If only some of a company’s local insurers are affiliated to the network, then a pool can be set up on the basis of those plans alone. In locations that are not insured with an affiliated insurer, but wish to be included in the pool, they will need to change to an affiliated insurer.
The advantages of benefits pooling
Specific advantages of benefits pooling include:
More favourable local policy terms and conditions due to economies of scale
Rebates – in the form of an international dividend – for a portion of a firm’s paid premium, when payments exceed claims and other charges
Global-level account support
Access to a detailed financial information report on insured benefit plans around the globe
Some networks offer enhanced free cover limits – the guaranteed sum insured for an individual without having to go through medical underwriting checks
Companies of practically any size can participate in pooling, provided they have operations in multiple jurisdictions. Importantly and fundamentally, the pooling mechanism does not change the design of the benefits received, or impact on the premiums charged (if anything, leveraging a global relationship can see premiums decrease).
How to maximise value from pooling networks
Many companies are already pooling their benefits. But this doesn’t necessarily mean they’re getting a full-value product.
A multinational energy and power equipment provider recently chose Lockton as the global broker and consultant for its insured employee benefits plans. The firm used a pooling network that had performed well in recent years. However, it was currently in an overall loss position from previous large losses, and so was not returning dividends.
During a review of the pool, Lockton negotiated to have all previous losses written off. We also negotiated that in the next year, there would be more protection for the pool, on a two-year stop-loss basis. For the firm, this meant:
Receiving a 50% dividend of any first-year surplus, with the remaining balance carried over to a second year
Any overall losses were then written off after two years
We did not recommend a fundamental change to the balance of the portfolio.
Following the review, the pool delivered a return in excess of £290,000, roughly 30% of the premium in the pool. As a result, the firm received a dividend of approximately £145,000, with the remaining balance carried over into the next year. This shows the rewards that can be achieved through experienced broker negotiation, even without making any changes to the local plans themselves.
Key considerations for benefits pooling
For most multinationals, opting for pooling is a no-brainer. There is no cost, and companies can walk away at any time, even if the pool is in a deficit position – so there’s no risk involved. The pool can provide a potential dividend, along with the other advantages listed above. Dividends may be retained by the parent company, or re-allocated to the participant subsidiaries in each country.
That said, there are trade-offs to consider. Local affiliates of a company’s chosen network might be less competitive, or offer worse service, than a company’s existing local insurers. Therefore, it’s important for a company to work with a network that aligns to their geographic footprint, including any existing insurance affiliations and ancillary services. A global consultant can help companies to identify the networks that best meet their needs.
As an alternative, other companies may not be large enough to create a pool that provides significant value. To overcome this, Lockton has created a Broker Pool, offered exclusively to clients of Lockton and Lockton Global Partners.
The Broker Pool gives single local subsidiaries of a multinational the option to pool their risk with other Lockton clients. Advantages include enhanced free cover limits, and the opportunity to receive dividends where the result is positive.
For further information, please visit the Lockton Global People Solutions page (opens a new window), or contact:
Stephen James, Senior International Benefits Consultant
E: stephen.james@lockton.com
Freya Durham, International Associate Consultant
E: freya.durham@lockton.com
