In a world that is getting smaller and in which commerce is increasingly global in nature, the coverage of group employee benefit risks on an international basis has an inescapable logic. In addition, the introduction of EU legislation designed to open up markets to foreign companies and to encourage cross-border selling of financial services further demonstrates that group risk is not a purely domestic affair.
Reality, though, falls short of expectation. It is true that the group risks of certain companies with workforces in multiple locations around the globe are addressed internationally, but the vast majority of risks are handled on an intra-national basis.
There are good reasons for this. First, there are significant legal and fiscal barriers, EU directives notwithstanding, which ensure that insuring benefits with a foreign insurer is not usually a viable option, especially where the risk benefits are closely bound up with pensions. There are, though, a few exceptions. It is not unknown, for instance, for Austrian group risks to be insured in Germany or those emanating from Luxembourg to be placed with a French carrier.
Language is another barrier, highlighting the fact that group risk benefits have to be delivered locally. Not only do local regulations and laws have to be applied and local practices followed, but benefits have to dovetail with social security arrangements and to work for the employees concerned, particularly at claim time. This is especially true of disability and medical benefits for which some form of claim management and control may be required. Another reason for choosing a local insurer is that companies and their employees like to feel that their benefits are safely insured with a name they know and trust.
But these traditional practices represent just one facet of the group-risk market. There is also a sizeable market in multi-national risk pooling, in which the group risks of a multinational organisation are aggregated for the purposes of judging profitability. Thus the volatility of small blocks of risk is reduced or even eliminated, and experience smoothed. Up to 1,000 of the world’s biggest international companies have pooling arrangements in place for their group risks, covering staff in as many as 20 different countries.
Even in a pool, local presences are vital. Clients are dealt with on a local level, and local knowledge, experience and practice can be applied. Tight management of local operations is, therefore, crucial, especially where the local operator is an affiliated partner of the pool manager. In such situations, ensuring that the organisations in the partner network are aligned operationally and ideologically, and managing the relationships are central to a successful and profitable pool. Poor performance by one partner impacts on the whole pool.
In 5 to 10% of cases, a captive insurer of the employer is involved, with a regular insurer fronting the pooling operation; co-ordinating the various functions; and managing the local practicalities such as regulatory compliance and claim management. Captives offer the benefits of cost savings; diversification of risk; boosting cash flow; flexibility; more immediate information and thus better overall control. But these advantages may be at best marginal and are only available to large organisations for whom a captive operation is viable.
It is difficult to gauge the size of the multi-national risk-pooling market. Pooled premiums are not identifiable from official figures, and the main players, such as Swiss Life, Generali, IGP and AIG, are reluctant to discuss business volumes. One estimate puts the total risk premiums at over US$500m (£341m) annually, with associated pension benefits worth almost twice that figure.
There are around 12 major networks providing pool facilities, and covering a whole range of risks from life and spouses’ benefits to disability and medical. Swiss Life, for example, operates in 45 countries, either through its own local operations or through partner organisations. The number of players is unlikely to alter greatly since high entry barriers discourage newcomers and, although the industry is consolidating globally, the current operators are big outfits with a good chance of survival.
But while pooling is a growth market and cross-border coverage of individual employers’ risks rare, a handful of Lloyd’s syndicates have carved themselves a niche in the international market. Lloyd’s are licensed to write business in EU countries, as well as various other nations around the world. The syndicates specialise in small groups of lives – up to 250, but mainly up to 50 – and situations where there are special needs, such as an unusual risk or an individual whose benefits do not conform to the standard pattern. They can be flexible on currencies too. This coverage, though, is restricted to group life benefits and, although Lloyd’s will be empowered from 2001 to write business for durations up to 25 years, this is unlikely to change. Darryl Meech of Crowe Life, one of the leading syndicates, says his company writes twice as much group as individual business, and reckons nearly a third of that is international.
Paolo Marini at Generali International in Brussels says: “Up until a few years ago many still thought that EU freedom of services legislation would encourage group risk premiums to flow to centres where rates were low. But this has not happened and risk pooling has shown good growth.”
And with a line of barriers standing in the way of cross-border risk placement, it looks like staying that way for the foreseeable future. Companies do not have the appetite or the ambition to venture into new markets, although the ever-growing international insurance groups are extending their strength and expertise across borders for the benefit of clients.
But it looks as though the theoretical appeal of cross-border coverage could diminish anyway. European markets are liberalising and becoming more competitive. Thus group risk rates are falling and price variations between countries are eroding. The differences that remain will come down to local experience.
Experts agree that multi-national pooling will continue to increase in importance. Stephan Beit, executive vice-president at Swiss Life in Zurich, cites the continuing globalisation of commerce. He believes that the biggest growth will come from medium-size firms opening up new markets around the world – IT companies are a good example. These include the kind of dynamic, responsive organisations that are coming to epitomise modern business, as well as the dismembered, smaller, independent operating units of old conglomerate giants. With increasing competitive pressures, companies are looking ever more closely at their costs. With employee-benefit provision now being as much a finance issue as an HR one, there is a quest for more control and more capital-efficient solutions – as well as for consistency of benefit design and delivery.
Roger Beech, European partner at William M Mercer in London says: “On employee benefits, firms are increasingly taking a stance similar to that on non-life covers. It is a global perspective and centralised purchasing for greater transparency and control over levels of service.” He reckons there is growing emphasis on service. This trend is placing the broker’s role under the spotlight, and shifting remuneration towards fee for service. It is also driving insurers to providing flexible products that can be tailored to an individual client’s requirements, for example combining conventional and stop-loss covers.
Swiss Life has recently introduced a modular product with this in mind.
Does this increasing focus on value contributed point to a new way of covering group risks? Generali offers a variation of the multi-national pooling concept called ‘Plus’ (Pan-European Life Underwriting System), which involves centralised rating of risk, so that one rate applies to the whole group rather than a series of rates applied to local groups. While this streamlines management of the risk, the emphasis on central responsibility can mean it is difficult to leverage valuable local expertise.
Looking ahead, could the group-risk business be split up into the various components of the value chain, such as client-relationship management, benefit delivery and claim management, product development and risk management? A further step might be the creation of a Web-based exchange or trading platform for these risks, or even an e-auction where insurers bid to cover risks. This, after all, follows the modern technology-enabled business model and the way that other markets are developing.
Maybe group business could be re-organised in this way, but in some respects insurance is a very resistant to change. And in many places, part of the necessary infrastructure – like third-party administrators – are rare or do not exist. This highlights the need for local knowledge and expertise, for group risks are far from homogeneous. Losing that local touch can make all the difference between comfortable profit and heavy loss.
But then group risk is an increasingly competitive business, especially where large, multi-national risks are concerned. It is inconceivable that the market will not see innovations that improve service, create new forms of value and drive down costs.