Come into the pool, the water’s lovely
The proponents of insurance pooling for international groups’ employee benefits see untrammelled potential for their business to expand among multinational groups, even though the idea has been around for decades.
Stuttgart-based Peter Eyre, who runs the All Net network dominated by the giant Allianz insurance group, says: “We reckon that the employee benefit risk premiums business represents an annual cost of $60bn(e55bn) annually for the world’s top 4,000 companies.” But he thinks the fraction of that being pooled is still small, probably less than 5%. “So with 95% of the market among the major companies not being pooled, this is not a mature market and one that has tremendous opportunities.”
But the insurance networks argue that, from an international employer’s point of view, there can be nothing but gain from entering into pooling arrangements. As Michelle Rosen-Oberman of the Swiss Life international business development team in Zurich says: “We are amazed at the number of multinationals not taking advantage of networks and pooling. There is no downside to pooling from a multinational’s point of view as they are not obliged to do anything.”
One of the longest in the business is IGP, which is managed by John Hancock, the US insurance group. IGP says the mystique that used to surround pooling has been dispelled. “It is part of everyday business for a multinational – there is nothing weird and wonderful about it,” says Peter de Vries, who runs the group’s Brussels office.
The idea behind pooling is as straightforward as any insurance idea can be. Among other benefits, pooling allows a multinational to share in the favourable claims experience associated with its business, but this is done without interfering with the local insurance arrangements, where the local insurer is part of the network. As de Vries explains: “Everything about the contract is local and standalone – the language, the currency, the terms and conditions are typical but competitive in that market.”
Once a year, usually, the technical results from each participating local insurance contract are pooled together at network level and calculated as one international account for all the insurance arranged by the multinational with network insurers. “If the total income exceeds the expenditure, there is a positive result, or if there have been heavy claims, it could be a deficit.” After deductions for expenses and administration, as well as retentions, the positive balance is paid to the multinational, which therefore participates in the favourable outcome of the insurance business (see the table opposite as to the proportion of clients obtaining dividends from their network programmes). The lack of downside is that, should the account be in overall deficit, the employer does not have to pay anything back. The Group Insurance International Network (GAIN) points out that the average size of its dividend has been 12.71% of gross premiums in 1998 and was 20.6% in 1997.
The insurers involved in networks can be the local operations of the big international groups, or frequently independent players. Networks usually like exclusivity of their correspondent insurer, but that is not always possible, depending on the market.
The system clearly benefits insurers because, since negative results in some countries reduce the positive results elsewhere, the multinational may take a keener interest in local results than might otherwise be the case. But the insurers’ main motivation in running networks is to attract new business and retain existing clients. In the view of Eyre of All Net: “What we are doing is offering global discounts to these companies. The mechanism happens to be pooling.”
Pooling is no exception to insurance groups’ natural tendency to wrap something simple in layers of complications. To protect the account from fluctuations in the claims experience, various devices such as stop-loss or carry-forward and amortisation mechanisms are available, as indicated in the responses. Another important feature of network arrangements is the extent to which the multinational’s business is eligible for pooling. Here the groups’ approaches vary, both in limiting the extent of risks that can be covered, as well as the type of business.
IGP’s de Vries points out that there are ways of limiting the amounts that come within the international account. “If, for example, a senior executive dies and is covered for $1.5m, not all of this would necessarily be charged to the pooling account, perhaps the limit is only $300,000. But part of the premium would also be excluded from the pooled business.” There can be local reasons why certain classes of business cannot be included in the arrangements.
As also can be seen from the table, the qualification criteria for participation in a pool need not be large, particularly to avail of smaller group pool arrangements. Alan Hewitt of consultant William M Mercer’s Brussels office believes that while these encourage smaller companies operating internationally to try pooling, the aim is also to accommodate the bigger groups, who may not have significant poolable business immediately. “By giving access to the network, with the improved underwriting conditions and free cover limits in some cases, and then when enticed by the favourable results, they will expand their participation in that network.”
It is common for larger groups to use a number of pools, he says. “Traditionally, groups often inherit pool membership, say as a result of an acquisition. Or the network may have been prospecting and identified clients already insured in their network, with whom they can set up a convenience pool to start with. A large proportion of multinationals are working with two, three or even four networks.” Often they will rationalise that and reduce the numbers, but Hewitt advises: “For a very large group, it does no harm to work with more than one network, as it gives their subsidiaries a choice of insurer locally.”
The increasing interest on the part of multinationals in using their captive insurance companies in their employee benefit programmes has found a ready response on the part of the networks, who are keen to work with them in a variety of ways.
Swiss Life’s most sophisticated product is an administration-only product for captives, as Rosen-Oberman explains: “This is not really a pooling product, but a service for multinationals with a captive. Through a system of reinsurance and retrocession, the risk goes back to the client’s captive, so that at the local insurer level you are left with the administration. With the actual risk and cash going to the captive, it is a cashflow management system for the client.” But other pooling products of the group are designed to work with clients’ captives, she points out.
All Net’s Eyre sees the market going this way too: “We have unbundled all the reinsurance features and we enable the clients to determine their appetite for risk on a worldwide scale from one single policy.” This means they can easily deal with captives. He sees a shift in emphasis as employee benefits move from the domain of human resources to being a financial and risk financing issue. “Risk managers are finding there are millions of dollars of coverage, very stable, ideal for risk management for obtaining dividends or discounts, and for working within captives.”
But a word of caution comes from de Vries, who is no less positive about captives. “At IGP we look very favourably on captives because a captive shares in the risk.” Since John Hancock reinsures all the network’s pooled business, clients’ captives can take over this business. “We would pass 100% of the reinsurance to their captive if that is what they want. This has happened over the years, but last year only about 10 out of 600 multinational clients were bearing risk under captive arrangements.”
At Mercer, Hewitt says it is “a very open scene now when it comes to captives. All the networks are beginning to get into the act for captive programmes.” There are many variations on the theme of using them within a network framework.
Swiss Life sees this market as having a great potential for asset management products. “Clients are also interested in this side, as well as the risk side, ” says Rosen-Oberman.
The structure of the market has to be a concern not just to the networks, but to their clients as well. Even among the 12 or so main networks, there are variations on how proactive they are. The Zurich group’s own network, comprising many of its own worldwide operations, is clearly rethinking its strategy and has not been a high-profile player; it declined to participate in the survey as a consequence.
One theme in particular is the ongoing consolidation within the insurance industry, making it hard for networks to find local replacements when a takeover occurs. The GAIN network says it is in the middle of a reorganisation. As a result of the many acquisitions last year, some members have found themselves associated with other networks. New members are now being added, it says.
In the view of some, consolidation could lead to mergers of the networks. Hewitt believes that any changes are likely to be gradual. “In 10 years’ time it might be down to eight or nine from the dozen or so currently.”
He is positive about the future of pooling and what it can do for multinational clients: “We are promoting it more than we have been.” And among the networks, the same note is sounded. “There can be a great deal of optimism about the future of networks,” says Eyre. “There is a tremendous opportunity that is in fact only available to a few international insurers.”