Thought pooling was just for the big players? Think again. Nele Segers outlines the financial case for the smaller pool
It is a truth universally acknowledged that pooling allows large companies to receive a potential refund on their employee benefits premiums.
As it uses the concept of economies of scale and spreading of risk, the larger a pool, the greater the potential refunds. However, successful pools are not necessarily those that cover a company’s largest locations.
While it may be tempting to focus pooling attention on employee benefit policies that cost a company several hundreds of thousands of pounds a year, hoping to claw some of that money back, there is often more merit in focusing one’s attention on smaller, less costly policies.
After all, where an insurance company insures a large group, it is likely to have more credible statistics on past claims experience and be in a better position to determine an appropriate price for the risk, implying less margin for safety.
In contrast, such information is less easily available or reliable for smaller groups. This is why insurers may use tabular, age-related rates when pricing a smaller policy, rather than relying on past claims experience.
Past claims experience
So, if you manage a policy where rates are not linked to past experience, how can you still ensure you pay the right price based on your claims experience? You can either join a pool or set up your own pool. This article explains how pooling also works for smaller groups.
If a firm is a subsidiary of a foreign multinational, you could have the client join the parent company’s pool.
When preparing a market review of policies, it is important to ensure that pooling is part of the overall discussion. Ask the insurers if the client operates a pool with the network that they are affiliated to. Canada Life and AXA PPP healthcare, for example, are part of the IGP Network. The insurers can check if the company HQ has set up a pool with their network and can provide a pooling illustration, showing the potential savings that one could expect through pooling, in addition to their quote.
The insurer’s quote, service and the potential pooling savings should represent a competitive package. By placing these policies with the network insurer, the client firm becomes eligible to join the pool. This is subject to the corporate office’s approval, so make sure there is communication the choice of insurance company to them and the wish to join the pool.
This is also a good time, if you haven’t done so yet, to check how any margins the policy might contribute to the pool will be returned to the joining firm. If you are not sure who is managing the pool at the corporate office, the insurance company and the network will be able to help you.
If the client is the head office of a small multinational, you could have it set up its own pool for group life, group disability and group medical premiums and, in some countries, insured pensions.
If you do not have a pooling arrangement in place, you can establish one. It will allow a benefit from pooling advantages in the UK but also make it possible for any overseas operations to benefit from this arrangement too. You do not need to be working with a sizeable multinational to set up a pool.
The Small Groups Pool
As long as the company has operations in different countries and a decent spread of employees you can set up a successful pool. Specific pool types exist to maximise savings for smaller accounts. IGP, for example, was the first to operate a so-called ‘Small Groups Pool’ (SGP), which allows smaller or growing multinationals to also benefit from pooling. It helps protect small, volatile accounts by combining their experience to form one very large, more predictable pool.
Pooling results are first determined per client pool and then consolidated within the overall SGP. This means pools that have a positive margin will give up some of their margin to compensate for negative results in other pools. As a result, pools with negative experience will not carry forward deficits and, therefore, have a greater potential to generate international dividends in future years. Small pools are bound to have a degree of volatility, with good years alternating bad years. An SGP can help manage the volatility of a small pool.
Pools can generally be set up as soon as one ‘poolable’ policy is insured with a network partner. However, you will be expected to actively encourage other policies to be added to the pool. After all, the benefits of pooling lie in leveraging the global size.
Once a pool grows over a certain threshold, it may be possible to select between different pooling mechanisms that are more suited for larger pools. That said, smaller multinationals that may not have the capacity to grow out of an SGP can still make significant, long-term savings by including (or keeping) all their poolable policies in their SGP account.
The value of pooling does not lie in potential refunds only. A pool is an important source of information on employee benefits plans around the world. The pooling network will prepare reports that consolidate information on the benefits offered, the cost of those benefits, the local contract renewal dates and claims experience among others.
For many companies, large or small, the annual pooling report is an invaluable snapshot of their insured employee benefits around the world.
In addition to reporting on the pooled policies, pooling networks can often also report on the experience of policies that are placed with their network partners but for some reason cannot be pooled, such as non-insured funding arrangements.
Furthermore, country profiles detailing typical employee benefits practice and information on social security are often made available to clients. International or country-specific employee benefits seminars may be organised too.
While a dividend is often put forward as the main advantage of pooling, the value and level of detailed information that can be obtained through a pooling network should not be underestimated.
Only group policies can be pooled, but in some countries group policies can be established for as few as two people, while in other countries more employees are required. A pool requires a certain balance to be successful: a relatively homogenous split in employee numbers over different countries will help you set up a successful pool.
Advisers’ key role
The adviser has key role in the process, in ensuring that pooling options are considered for clients. If you know that the client is a subsidiary of a multinational, ensure that you check with the insurance companies as to whether there is a pool already in place. If so, you can request a pooling illustration, which you can take into consideration when analysing the quotes from different insurance companies.
Insurance companies need to offer competitive terms, regardless of whether a policy can be pooled or not. It may occur that a quote from an insurer that offers pooling happens to be slightly more expensive than that of other insurers. However, a comparison taking into account the potential returns through pooling, as detailed in the pooling illustration, will often show that they are a more affordable choice in the long term.
Future pooling returns
Potential future pooling returns can be an argument for justifying selecting an insurer whose quoted premium is slightly higher than that of competitors. The pooling illustration will help you demonstrate to your client that the long-term savings achieved through pooling have the potential of being more advantageous than incidental rate reductions.
If your client is the head office of a multinational, you can be of invaluable assistance in setting up and managing a pool. As an adviser, you are the primary liaison between your client and the network and you will oversee the general project management.
A degree of high-level co-ordination will be required to ensure all subsidiaries join the pool. Any day-to-day activities can be managed by the network with frequent communication regarding progress.
While some advisers use their foreign offices or their contacts within a broker network to help their clients manage a pool, having overseas offices or connections is certainly not a prerequisite to assisting a client with its pool. Close and transparent co-operation with the pooling network is generally sufficient to set up and maintain a successful pool.
In short, pooling can generate significant, long-term savings for policies and multinationals of any size, and can be particularly beneficial for the smaller ones. In addition, pooling provides access to invaluable management information.
The adviser community plays a key role in ensuring that pooling options are considered and the awareness of its long-term benefits is brought forward in particular for the smaller players.
Nele Segers is senior account representative at IGP
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