The management of group risk benefits is in the process of elevation from an art to a science. No longer is employee benefit provision and the risks involved the sole preserve of HR.
“It’s no longer a case of HR simply buying insurance products,” says Tony Salter of consultants PricewaterhouseCoopers’ healthcare and risk benefits practice in London. “Modern risk benefit management requires a great deal of knowledge and skill. We’re starting to see a new breed of very capable risk managers.” Salter believes it will not be long before companies start appointing corporate risk officers, combining financial skills with the more traditional insurance-oriented expertise, and working alongside the chief financial officer – and having almost as much muscle.
Companies are now taking a more holistic approach to employee benefits, taking the opportunity to insure as many risks as possible: not just the traditional group life and disability risks but the longevity risks associated with pensions too. The management of pensions mortality outside the pension fund means that pensions trustees now need to familiarise and involve themselves in risk matters.
For multi-national companies, risk pooling or use of a captive are compelling options because of the financial and administrative efficiencies involved. Pooling is on the increase, partly because more companies are attracted to it and partly because of the consolidating global insurance market. The bigger, more powerful players that are emerging naturally have a wider reach, and are more international in their outlook too. Thus they are more naturally looking to provide solutions that match their clients’ multi-national presence. This is big-ticket business too.
Paul Marcotullio at consultants Watson Wyatt says that there is no clear verdict on the best way of operating a pool. “It depends who you talk to,” he says. “An insurer running a network would say that they are able to tap into and work with the top five insurers in each country. That gives them the best of the available expertise and exceptional flexibility.” A network also introduces an element of competition to the pool and the pool operator wields a significant amount of power over the network members. So a networked pool should be very competitive overall. On the other hand a pool managed and operated by one insurer is a simpler operation, making for easier control, and one large organisation ought to make for economies of scale. That both types of pool operate successfully demonstrates that each can be made to work.

In pooling the nature of the ‘product’ is continually under development. The internet is facilitating the wider and quicker sharing of data and other management information, helping accelerate the payment of pool dividends. In the past a delay of 18 months from the end of the risk period to finalising the accounting was not uncommon. With earlier presentation and settlement of accounts, vital cash flows are improved considerably.
The imperatives of capital efficiency and the smoothing of cash flows are driving more firms down the captive insurance company route. “It’s true that there are significant set-up costs,” says Waton Wyatt’s Paul Marcotullio, “but once a captive is established the benefits start to flow through. And companies are willing to take on more risk, and keen to benefit from the potential rewards.”
Salter points out “Whether or not it’s a good idea to use a captive for funding employee benefits will depend primarily on its efficacy in reducing risk costs compared with other vehicles. This is influenced by a number of factors, including the captive’s tax efficiency, its ability to implement strategies for risk reduction and post-loss risk control, and the scope for leveraging synergies across other risk classes.” Financing employee benefits risk through an existing captive diversifies its risk portfolio, while the transfer of premiums and claims reserves increases its capitalisation and makes for more efficient risk financing overall.
Notwithstanding these advantages, a captive still needs access to competitively priced reinsurance cover and to generate strong investment returns. It needs low operating expenses too. Furthermore, a captive may need to operate within a multi-national pool, for example in countries where the insurance market is restricted and where local companies are needed to front the risk. And unless they write business from third parties, captives may find it difficult to obtain stop-loss or other non-proportional cover to limit its losses. The line between captives and pooling, then, is far from sharply defined.
The increasing sophistication of group risk benefits is growing the market for the big benefit consulting firms. Although markets in continental Europe have been less consultant-driven than the UK or North America, that is beginning to change. While scheme design and benefit entitlements are reviewed periodically, consultants have a prime role in generating cost efficiencies through alternative transfer methods and risk reduction, including rehabilitation and absence management, as well as through re-broking.
Marcotullio talks of closer, three-way relationships between client, consultant and insurers covering all aspects of benefit programme design, scheme administration and risk placement. And while costs are increasingly a group finance matter, there are closer links with HR departments. “HR technology is an expanding market,” says Marcotullio. “B2E – or business-to-employee – communication is a sphere that’s growing. We are doing a lot of work specifying and supplying HR software for use on company intranets, allowing employees direct access to general information and to the specifics of their benefit package.
Paul Pelok at consultants Aon echoes the point about relationships being closer, and changing in nature. “We are more involved in decisions about the fundamentals of risk transfer and financing,” he says. “With firms willing to bear more risk themselves, self-insurance, shared liability and captive operations are increasingly on the agenda.”

Pelok says that the slow trend towards flexible, cafeteria-style benefits calls for consultant input too. The diversification of the benefits available can reduce purchasing power and generate free cover and underwriting issues. In the UK, critical illness cover is gradually gaining acceptance in the contexts of menu-driven and executive benefit packages. But while employees tend to appreciate the ‘windfall’ nature of critical illness payouts, the cover seems unlikely to become a mainstream benefit, at least not in its current form.
Multi-national pooling apart, there is still little evidence of cross-border group risk placement, taking advantage, for example, of low mortality risk rates in the UK. “It’s rare because local regulations forbid it and tax laws make it difficult,” says Aon’s Pelok. There is also the issue of reassuring employees that their benefits are provided by a local company. But with harmonisation moves within the EU, a more European approach can be expected to develop in due course.
It should not be long, though, before some group risks are put out to tender on the internet. The net is, after all, famous for driving down prices in a variety of markets. While some business gurus believe this mis-guided preoccupation with price means that the real benefits of the internet to buyers and suppliers, have yet to be realised, it has emphasised the commodity nature of certain products.
Group life and lump-sum disability are increasingly regarded as commodities for which placement decisions are made almost on price alone. But where healthcare benefits and pensions are concerned, service counts for a lot. But that doesn’t, of course, stop the market for these benefits too being highly competitive.

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