The power of pooling resources
While the multinational pooling concept has been around for over 50 years, interest in this global funding mechanism remains as strong as ever. Having gone through periods of reduced priority for multinationals during the 1990s, the recent focus on global governance and Sarbanes-Oxley legislation in particular has led to a revitalisation in the multinational pooling arena. Greater governance has translated to greater centralised control over employee benefits plans, which in turn has meant a stronger focus on the efficient funding of these plans. Multinational companies are re-discovering the advantages that pooling can bring.
Pooling has regained focus and priority from the international human resource and benefits community, mainly since the information reporting from pooling helps a company better manage its corporate governance strategy. From the ability to gather existing plan information to the tracking of new plan benefits or changes, pooling’s ancillary features are starting to become just as important as its financial savings. To fulfil the exacting requirements of Sarbanes-Oxley, many companies simply are unsure where to begin since many have acted in a de-centralised mode and so have no existing data on their employee benefit plans globally (outside of any FAS 87 or IAS 19 reporting). By utilising a global pooling network, detailed information can be captured on existing insured employee benefits plans (many of which may be completely unknown to the headquarters) to create the initial baseline reports of their programs. Also going forward the pooling network can be an important component to a multinational’s governance structure by alerting corporate or regional headquarters to any plan design changes or new plan implementation.
To complement the increased flow of information pooling provides many companies are investing in technologies that enable them to access and maintain this data on an on-going basis. The pooling networks as well as the major consulting firms have developed electronic databases for this purpose. The primary functions which clients are demanding from these technologies include 24-hour internet accessibility, multiple security levels allowing varied access rights, and customised reporting capabilities.
Having realised the value of the information provided, many multinationals are pushing the networks to speed up delivery of this information. Historically, pool reports could only be delivered six-12 months after the end of a pooling period. So for a plan commencing 1 January, 2005, the experience data may only be delivered June 2006; clearly too late to allow the company to make any adjustment in plan design or premium changes for the current year.
Companies are quite rightly demanding faster access to pooling experience data; quarterly or semi-annual experience reports are in greater demand, especially for larger pools. An annual pool report should ideally provide only confirmation or a summary of what a client already knows. It should not produce any surprises in experience because the client would have already had access to experience updates in the pooling year, enabling them to take more timely action on design or premium increases. Overall, companies now wish to be looking out of the front window rather than the rear window when managing their pools.
While historically touted as a global benefits risk tool, in practice the pool platform has never been utilised to its full potential. However this is changing. The increased global risks that take the form of HIV/AIDS or war on terror have meant that many multinationals struggle to understand just what their global risks may be, let alone manage them. With many local contracts allowing exclusion of such risks, the pooling mechanism is now being used as an umbrella mechanism to allow multinationals to provide additional risk coverage for areas such as HIV/AIDS where the local benefits contract may exclude it. There are an increased number of protection mechanisms available from pooling networks to help companies cap individual or aggregate losses on its pooled coverage.
Multinationals used to be content to pay insurance premiums, then wait 18 months to get a pooling dividend back (assuming the experience is good). However, with increased global competition and the large scale removal of tariff rating, many companies are focusing more on cash flow than on size of pooling dividends to measure the success of their global arrangements. There is an increased desire to realise as much saving up front as possible, and not to wait or ‘lend’ the insurer any more of the company’s funds than they have to.
In doing this there is significant interest in full risk transfer captive solutions whereby the global pooling network essentially provides a ‘front’ for a multinational on a local basis providing just a contract and service. All risk is ceded to the multinational’s wholly owned captive entity, therefore the multinational is taking the global risk on its benefits contracts. In doing this the multinational reduces the pooling network’s charges to just administration services and provides the greatest cost saving opportunity for a multinational. Nevertheless these arrangements are not for all, since adopting this route means the shifting of the risk management and much global administration work to companies. So far it is estimated that only 25-30 multinationals have actually been able to implement this.
Other changes in funding flexibility have occurred with regards to local profit share ( or participating) markets. There is also an increased desire to streamline the local premium levels as much as possible. This means opting for local non-participating arrangements where available and eliminating excess local profit share loads which have dominated markets such as Japan in the past. Many insurers can be reluctant to offer non-participating products which reduce up front premium in return for removal of local profit share arrangements, since they would effectively cannibalise their existing portfolios.
However, the focus on improved cash flow and greater global insurance competition means that ultimately local premium funding arrangements will only become leaner going forward. This is not just restricted to local profit share arrangements but also to the structure of benefits contracts in certain markets. The unbundling of risk coverages continues to pick up steam in the pooling arena since it not only allows more flexible funding but also gives greater flexibility to any required switch in carriers. The unbundling of risk benefits from the pension benefits allows a multinational to select the most appropriate providers for each benefit, especially the pension benefits where the best carrier may not be part of a pooling network. It also makes it far easier to pool the risk benefits and to enable any switch of carriers without having to consider any costly termination penalties.
In addition to this revitalisation of interest in pooling over the last few years, we have also seen changes in the capabilities of the networks. There are nine active networks operating in the pooling market these days. Between them they have over $3.6bn (e3bn) of pooled premium spread between 2,200 clients. The networks have been impacted by both the global consolidation in the insurance industry and the expansion into new markets such as eastern Europe and south Asia. This has in turn meant that in the last five years we have seen an average increase of 13% in the number of countries that a network will now offer local insured coverage in benefits.
Overall, the average number of countries that a network will provide coverage in has risen from 56 to 63 in the last five years.
Networks are increasing their efforts to offer some sort of global service standards and agreements to their pooled clients. With this loss of exclusivity and increased competition in the marketplace, one area some networks are trying to differentiate themselves is in the delivery of global service, whether it be in the form of pool report delivery or local claims payment. This is still a work in progress but one which many clients welcome.
Our firm originally conducted an informal survey of leading multinationals in 2002, and found that only 20% of companies had recently (within past two to three years) negotiated the terms of their multinational pooling agreements. Over the past three years however, there has been a marked change in corporate behaviour. More and more companies are seeking to identify the unique costs and fee structures of their pools, and are using this knowledge to negotiate better rates and terms for their companies. Network retention rates, reinsurance charges and premiums held in reserve are some of the primary cost drivers that companies have identified and actively negotiated with their pooling providers.
Overall pooling remains an important mechanism to multinational companies. The value is increasing for many multinationals not just in the financial returns but as a mechanism whereby they can better manage their employee benefits programmes from governance to risk management and to even managing local service quality.
To maximise the financial and non-financial benefits of pooling arrangements, multinationals companies now realise that pools must be actively managed and not just left to run themselves. We are now starting to see greater flexibility and availability of tools/information from the pooling networks to assist in this.
Francis Coleman and Gerry Winters are both senior consultants with Watson Wyatt’s International Practice