“We’ve seen a decrease in strategic-type work and an increase in consultancy focused on improving pool management,” says Paul Marcotullio, senior consultant in Watson Wyatt’s international practice. This neatly sums up one of the characteristics of the multinational pooling scene. Multinationals everywhere are intent on reviewing pool performance and management in a quest for better results.
Peter Eyre at All Net refers to a trend towards ‘scientific’ pooling. “There’s a great deal of focus on tightening pool management – use of captives, balancing volatile property/casualty risks with more stable life and disability ones, and optimising reinsurance coverage,” he says. Swiss Life’s Werner Leiser too reports a drive towards consolidation and rationalisation: “We are seeing a lot of emphasis on reducing the number of pools a firm is operating.”
The scope for improvement can be considerable. Marcotullio talks of one pooling arrangement for which annual deficits of around $300,000 were converted to a similar-sized dividend. That is around 6%, which compares very favourably with the 2.7% average recorded by William M Mercer in its 2000 pooling survey. Mercers’ Yvonne Sorsino says “That figure of just under 3% is an eye-opener, given the sort of returns that can be achieved. It suggests that a lot of companies don’t have their pools managed or structured in the right way.”
Swedish technology company Ericsson overhauled two of its pools for a 100% increase in bottom line result. Small wonder, then, that there is so much activity in reviewing pools, re-tendering business, renegotiating local contracts and introducing new monitoring processes that allow prompt intervention in response to specific events or changing experience.
While 11 September has had a major direct impact on the experience on the pools of some multinationals, there have been knock-on effects for others. Those terrible events have prompted corporations to look more closely at the risks to which they are exposed and how they are managed. But also the downturn in the US and the slowing of the global economy are forcing multinationals to look critically at all aspects of their business. This means that risk managers and human resources directors are under increasing pressure not just to trim the costs of benefits provision but also to improve their effectiveness. That is why, for example, there is a new emphasis on disability claims management within pools to speed employees’ recovery from illness or accident and get them back at work.
Industry experts agree that for many pools there is a sizeable gap between current performance and what could be achieved; arrangements that are optimally structured, financed and managed are strides ahead of the majority. One reason is that risk management is now the name of the game, not merely finding vehicles for benefit provision. Many large corporations still lack the expertise to handle a major and diverse portfolio of risks, leveraging synergies and exploiting inter-relationships between risk classes. Employee benefits are too often the responsibility of the HR director. “A dedicated risk manager is more likely to be on top of all the issues,” says Marcotullio. “The ideal set-up is the HR director and the risk manager working in tandem, combining their perspectives of the business and applying their joint expertise.”
Another factor is the way the multi-national is structured and the degree to which management control is centralised. If risk management and HR policy are firmly controlled from the centre it is easier to optimise pool structure and management processes. Most experts are agreed that a pro-active approach involving close monitoring, intervention and regular, searching review is important. Here relationships, between client, network manager and consulting firm are key. Winterthur’s Justine Wallington speaks of “active risk management through three-way partnerships. The right relationships mean easier information gathering and quicker, better decision making”.
A growing number of multinationals are looking at and adopting the captive approach. Winterthur has a team specialising in employee benefit captive arrangements. “There is a definite trend in this direction,” says Wallington. “The Columbia Energy ruling has prompted a lot of US companies to take a serious look at using their captive insurer for employee benefits. And a pooling network simplifies the captive’s involvement. For example, supplying the captive with risk information is straightforward because data provision and access is key to pooling anyway.”
Sorsino believes that involvement of captives is set to grow. She cites a survey of multinational companies around the world, conducted jointly by Mercers and Marsh. It found that while just 2% of the sample used a captive for their employee benefits, 30% said they were interested in doing so within the next two years. While Columbia Energy has heightened awareness in the US – and beyond – of the benefits of using a captive insurer for employee benefits, it remains to be seen whether that case truly has opened the door, or will remain almost a one-off owing to the complexities of the ruling.
The multinational pooling scene is changing in other ways too. Some networks have been re-structuring themselves and revising their wares to offer a wider range products, more flexibility, the provision of advice and the inclusion of more specialised business such as ex-patriate pensions.
Consultants and insurers are also manoeuvring and re-engineering; one consulting firm is strengthening its capability and an international insurer is re-entering the market. That this is a re-entry, using previous experience, augmented by some new skills, is key; brand-new entrants would find this global market, dominated by major players with well developed skills, a tough one to penetrate to any significant degree.
Technology is facilitating change, mainly in the area of information gathering and accessibility. Mercers’ claims that one of its proprietary software packages reduces the time needed for a 50-country review from 18 months to six weeks. And timely information is crucial to successful pool management. The quest now is for virtually real-time information that shows the exact picture at any given time and how the experience is unfolding, enabling remedial action where appropriate – even intervention on an individual case. And while rare now, on-line tendering for business should become more common in future, either via an independent exchange or with multinationals establishing a process specifically for their own risks.
While the major consulting firms are busy with pooling reviews, they are also fielding an increasing volume of enquiries from new clients looking to start pooling their employee benefit risks, consolidate their risk portfolios and abandon localised profit-sharing agreements. According to Werner Leiser at Swiss Life, there can be considerable scope to pool new benefit risks. Leiser says that, aside from international organisations yet to employ pooling, “Some very large companies may have four or five convenience pools, but they may include perhaps only 15% of what could be pooled.”
It seems that corporate attitudes to risk management are mainly responsible for inhibiting market growth. Many corporations have yet to take a holistic view of their risks and employ scientific, cost-effective methods of management. Employee benefits are often still the preserve of HR, and risk managers with high-level positions, that is, with real organisational clout, are relatively rare. Size of firm may also be a factor. But it is not as though pooling is suitable only for Fortune 500-calibre companies. Three hundred lives working in two or more countries can justify its use. Some networks, for example Swiss Life and Winterthur, set their minimum at 100 lives.
In some ways the current multi-national pooling scene can be summarised as going ‘back to the future’; that is, not doing new things, but doing old things better.