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Multinational pooling in the GCC: save money while improving employee benefits

Risk & Analytics|Claims|Health and Benefits
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By Steve Clements | August 23, 2017

How companies following a multinational pooling strategy is producing a 15% average premium savings on health care employees benefit

It’s no secret that healthcare costs are spiralling upwards worldwide. Our 2017 Global Medical Trends study shows an average 7.8% annual cost increase across the globe. In the Middle East and Africa, rates are higher still at 9.8%.

In response, companies are desperately implementing cost-saving measures, but saving money without compromising the quality of the healthcare benefits you offer your staff can be challenging.

One effective way of achieving this is by implementing a multinational pooling strategy, which our research shows can produce average premium savings of 15%. It involves combining your group’s insurance contracts for employee benefits in different countries under one financing arrangement. Not only will this create savings through leveraging scale, it will also help you to assess your employee benefits risks on a regional or global basis.

In our 2016/2017 report Unlocking potential: global approaches to insurable benefit financing, we took a deeper dive into the mechanics and benefits of multinational pooling.

Here’s what we found, and how it could affect your company.

A choice of risk management techniques

One of the advantages of a formal multinational pool is that the risks associated with multiple countries and policies can be considered holistically. Profits and losses from individual policies can be offset and, if the overall pool is showing a profit, a proportion of this can be paid back to the employer in the form of a dividend. Sixty percent of companies we surveyed received dividends from their multinational pooling activities. Well-managed pools typically report dividends of over 10%, while the average dividend was 6% (with 29% of companies reporting dividends over 10%).

We know that different companies have different strategic objectives, which can affect the size of the dividend. Here’s a closer look at three different risk mechanisms employed:

  • Loss carry forward (LCF) In this kind of pool, deficits remaining at the end of the year are taken forward into the following year. LCF can be limited or used on a multinational level to write off deficits once they have been around for a set period of time. It’s a high-risk, high-reward approach.
  • Small groups (SGs) A small group pool is for multiple employers and measures surpluses and losses, sharing them among participants to distribute costs. An SG pool is best used as a default for a company’s employee benefit business with a multinational pooling network that doesn’t meet thresholds for premium volume or spread of lives.
  • Stop loss (SL) In an SL pool, the multinational pooling network bears all losses, receiving a higher retention charge in return. Surpluses, however, are paid to the company in this pool configuration.

We find that SG pooling gives a good option to start down the path of multinational pooling and should be considered for companies that don’t want to invest too much in a scheme up front. In the longer term, LCF and SL pools are likely to provide better returns.

LCF pools yield the highest dividends (6.5%), with SL closely behind (6.4%) and SG pools significantly lower. Though the dividends split hairs, many more companies opt for LCF pools due to lower retention charges and the potential for higher dividends during successful periods with good experience ratings.

Improved claims management

Data and information from the pooled policies and countries can be brought together into one place. This is an excellent way for a regional or global decision maker to view information on premiums, claims and claim ratio history, for their full geography in a joined up way. This information can be used pro-actively to help lower premiums instead of waiting for annual dividends to be distributed from multinational pools.

Some large global organisations take multinational pooling and claims management a step further by creating a captive – a licensed insurance carrier whose primary function is to act as a reinsurer for its parent company’s insurance risks, potentially including employee benefits.

To the extent allowed by local regulations, policies and claims may be dealt with by a local insurer, known as a ‘fronting insurer’ because they front the employee benefits for the captive. The captive then settles balances on a regular basis.

This is not a viable solution for all companies, but for these large organisations, the main advantage of creating your own insurance company, is that you will have greater control over pricing and rate setting, you can eliminate insurer risk charges, and gain better control over claims and claims management.

Plus there are potential cashflow advantages. An example of this is using long-tail risk reserves to form investment returns. This can be achieved by paying premiums to the captive at the start of the year, generating investment income over a long period while the claims are paid out slowly.

Using this method and then rolling out best practices across nations will see you build a uniform approach of effective risk management. By creating a proxy that is closely linked with local companies, communications are improved and you’re able to take advantage of better, more efficient relationships, driving down costs and improving a company’s claims and services ratings.

Improved underwriting resilience

The improvement in risk management yielded by introducing international pooling subsequently leads to the improvement of underwriting limits. This is key to medical and long-term insurance sectors, where the quality of cover and service is a huge factor in a purchase decision.

For this reason, it’s not always advisable to use multinational pooling as a way to get providers to reduce the premiums paid up front on their renewal dates.

For the larger organisations, captives have their part to play here, too. Using a captive eliminates insurer risk charges, making underwriting profits less of a consideration. These factors all stack up to ensure profitability by strengthening or reducing the need for underwriting.

Our research suggests that strong underwriting could contribute to an 8.1% average captive surplus on premiums reinsured compared with 6% in multinational pooling data.

How to implement multinational pooling practices

Many businesses will have employees based in more than one country. For example, many employers have their headquarters, or their regional hub, in the UAE but they have employees based around other GCC countries, or the wider Middle East – and beyond, for example into Africa. This represents a great opportunity to look at a regional, multinational, approach as an effective cost-saving measure. Your company must also have a centralised approach for the design and governance of benefits plans for the strategy to be workable.

Here’s a step-by-step guide:

  1. Assess your benefits strategy: First, determine whether your benefits strategy needs to make changes to accommodate the multinational pooling plan. This can be taken as a good opportunity to review your strategy as a whole; there are a lot of moving parts to the benefits world currently and you’ll want to make sure you’re in a strong position as you introduce a multinational approach.
    Be especially mindful of the loss ratios of existing policies - Are there any areas that have experienced cost increases in recent times? These insights can form an overview of what you’ll need to do to implement multinational pooling in your company.
  2. Create a benefits inventory: A regional (or global) benefits inventory will help you measure the current employee benefit systems in place across the various countries where you have staff. This helps build a bigger picture of the benefits culture in your business. What do you notice about the trends between countries? Is there anything that needs to change before you push on?
  3. Evaluate the fit between the pooling networks and countries involved: Make sure you’re using the best pooling network method for the nations and policies with which you are working. Our research found that pooling profits differ from country to country greatly, with Sweden coming in as the most profitable, making on average 41% of all pooled premiums in its groups. Conversely, Canada shows a minus 16% average for the same metric. But this doesn’t mean that all plans should include Sweden and shun Canada. By conducting due diligence and keeping focused on your own objectives, you can make any country work for your pool. 
  4. Make a roll-out plan: It’s a good idea to start in a single region and then build out. If you’re unsure what area is best to start in, think about whether you are pleased with your current benefit strategy or not. If there are particular locations you want to improve immediately, these may stand most to gain by having the multinational pooling strategy rolled out first. So for example in this part of the world you might look first at the Gulf countries, then consider the wider Middle East, or North African countries as you build your approach.
  5. Decide which risk contracts to include: You need to decide which risk contracts to include such as life, disability and medical or accident cover. To be suitable for pooling, group risk contracts need to be fully insured, employer-sponsored, and ideally completely employer-paid – that is, not including employee contributions, salary sacrifice or voluntary employee benefits programmes. This is because special arrangements would be needed to ensure equitable distribution of dividends to contributing employees, such as reduction in future premiums.
    Pooling is also unsuitable for standalone accident contracts where potential savings on premiums are low but the impact of a claim relatively high, and also for pension plans administered on an investment or capitalisation-only basis, with no element of insured risk.
    This is an extremely complex area so it’s advisable to engage with a consultant for specialist input.
  6. Consider an informal pool: Setting up a formal pooling arrangement may seem a bit daunting so before transitioning to a formal multinational pool you could consider bringing your different country benefits under one “umbrella” plan. For example you could collate medical and/or life insurance benefits as sub-policies under one over-arching policy with the local entities of multinational insurers. This will allow you to gain some advantages of scale and spreading of risk.

Taking the time and obtaining expert advice

In a climate of high competition, where costs are a big problem with no single solution, multinational pooling presents an opportunity that is relatively easily utilised. It has the potential to implement savings and improve service levels, making it an ideal solution for companies searching for cost-saving techniques that won’t harm them in the long run.

The key to this is to use the methods outlined above with a real understanding of your business’s particular needs and details. Multinational pooling is a multifaceted strategy and it’s certainly not one-size-fits-all. In order to get the best savings and have an impact on dividends, a great deal of time, care and expertise is needed in implementing it.

However, it’s a great weapon to have in the fight against rising costs.

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