Multinational pooling profits show wide variations
EUROPE - Multinational pooling of employee benefit risks including pensions can lead to wide variations in profitability depending on the countries covered, according to a new survey by consultants William M. Mercer.
The survey, which compares surpluses and deficits in individual countries, shows that in Europe the most profitable country in which to pool benefits is Finland, which produced an average surplus of 18% of premiums.
Ireland came close behind with a surplus of 17%, followed by Austria and Greece both with 12%.
The UK, however, showed a significant deficit of –25% and of the other European countries surveyed, Spain also recorded negative figures of –3.6%.
Roger Beech, European partner at Mercer, comments: “Some countries appear to offer greater potential for pooling surpluses than others, though within countries there may be variations in the performances of different benefits business.
“ On that basis, multinationals might want to review the countries and contracts currently included in their pools.”
Mercer says the UK results were somewhat distorted by a minority of unprofitable pools. Out of 236 UK pooling reports, 79 had a deficit while 157 contributed a surplus.
Overall, the survey shows the annual average dividend from multinational pools dropping to 2.7% of poled fund premium (on a loss carry forward basis), less than half that of the 5.7% figure recorded in 1998.
“ Most likely, the main reason behind this reduction in dividends is the increased competition in local markets. This results in lower, up-front premiums and local profit sharing which reduce insurers profit margins and, in turn, the capacity for excess margins to be released through pooling dividends,” adds Beech.
As an example of the variation in results, Mercer says that five per cent of pools recorded deficits of 50-100% of premiums, while four per cent of pools enjoyed surpluses of 50-100% of premiums.
The study also found that total retentions, counted as risk plus administrative charges, decreased as the total pooled premium volume increased.
Beech comments: “The evidence suggests that savings could be made if multinationals expanded their pools into with appropriate contracts or combined smaller pools into fewer larger pools.”
Beech also notes that many pools are not actively managed, thus increasing the chances of poor performance.