Multinational pooling, which is usually effected through a global insurance network, returns the excess of premiums over the sum of claims plus expenses plus risk charges. It also bases underwriting conditions on the total exposure to risk included in the pool. As a result significant savings in the cost of insured benefits can be achieved. All employee benefit risks can be pooled, including the longevity risk element in pension insurances.
The pooling arrangement does not affect the nature of the locally established insurance contracts which may, or may not, participate in the profits of the local insurer. These contracts remain subject to the laws of the country in which they are effected, with premiums and claims paid, and reserves maintained and invested locally. Rates of premium and underwriting requirements are, in the first instance, based on a local assessment of risk in relation to the insured employees and the distribution by age of their benefits insured. Unlike the local contracts, the pooling arrangement is not a policy of insurance, but an accounting agreement.
A central feature of pooling is an annual income and expenditure account in the form of a statement to the multinational company. This accounts on the credit side, for premiums and interest earned and, on the debit side, for insurer’s risk and expense retentions, commissions, taxes, increase (or decrease) in reserves, and claims and local dividends paid. Where the sum of the credits exceeds the sum of the debits, the balance is paid as an international dividend. This system of centralised accounting, which also records all the main transactions in the different countries, provides a ready source of information for the purposes of maintaining centralised control from the corporate office of the multinational.
If the sum of the debits exceeds the sum of the credits so that there is an overall loss, the deficit is either absorbed by the insurer under a stop loss arrangement or carried forward to appear as a debit in the following year’s account, depending on the loss treatment system selected by the pooling client. These two systems, providing for different treatment of losses, are known respectively as the ‘stop loss’ and ‘loss carry forward’ systems. Under the stop loss system all losses exceeding the level of self-retention are cancelled by the insurer. Under the loss carry forward system, as the name implies, any overall loss is carried forward to the following years’ accounts until cancelled by future surpluses.