Most advisers are aware of the concept of multinational pooling, but many with multinational clients have not yet put it into practice. Paul Avis explains why they should.
Alternatives to pooling
Local Insurers: Each subsidiary could sort out their own benefits with local insurers. Competition over price and service will always exist in local markets, and local processes for insurers and providers must be taken into account.
While the price should be competitive, appropriate pricing margins are good for the multinational company. Most multinational parents share some or all of any international dividend with the local companies, so the final cost for each subsidiary may be lower.
Global plans: In theory, some of the advantages of pooling could be achieved by using a pan-national insurance plan. This is a common approach in property and casualty insurance.
However, the market for such plans in employee benefits is very limited, with only a few plans available and often those plans are restricted in geographical coverage. Local insurers offer products designed to fit with the regulations, tax regimes and employee expectations in their countries.
Captives: Where appropriate, an alternative to traditional pooling business is to use a captive insurer, whether operating directly or with the assistance of a pooling network. To do so, although the MNC is a non-insurance corporation, it must have an insurance company as a subsidiary.
The companies who consider this are likely to be very large and many will decide to take on their own property and casualty risks, including building insurance, fleet insurance and liability insurance.
The potential claims for these products significantly exceed the employee benefits risks. Often, there is a demand for insurers to take the risk and reinsure the benefits provided by the captive insurer, thus maintaining the advantage a local insurer brings with regard to appropriate pricing and product design.
Some pooling networks can make this process easier by eliminating the need for each local insurer to have a bespoke agreement with each captive. Instead, the local insurers will have a reinsurance agreement with the pool and pool has a further reinsurance (known as a retrocession agreement) with the captive insurer.
However, the use of captive insurers for employee benefits is very limited. The best estimates are that there are only about 70 to 80 captives covering employee benefits worldwide.
This may be because some countries have restrictions on whether employee benefits can be provided by a captive insurer (for example, the Employee Retirement Income Security Act in the US). Overall, it is difficult to see how the financial and control benefits outweigh the complexity, especially as many of the benefits are available through standard pooling.
With each of the alternatives having drawbacks, traditional multinational pooling retains its place as a valuable tool for MNCs. The multinational national pooling networks are refining their products, offering new ways of sharing information and managing pools.
The networks and the UK providers that participate as partners will be able to give advisers more information to help them build on the opportunities.
Paul Avis is marketing director at Canada Life Group Insurance
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Loss models The differences between pool types are most noticeable when there is an overall loss. The two basic options are loss carry forward and stop loss.
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