BENEFITS &COMPENSATION

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The Future of Multinational PoolingAdeolu Adewumi

Adeolu Adewumi is a Senior International Benefits Consultant for Hewitt Associates and a member of its international benefits group, which consists of about 80 consultants

worldwide. She has recently relocated from the USA to Europe and is based in the Munich office. Mrs Adewumi provides services for multinational companies on a wide range of

global benefit issues covering the design, financing and management of global benefit programmes and is one of a team of multinational pooling experts. She has almost 10 years’

retirement and international benefits consulting experience. Mrs Adewumi has a dual Bachelor of Science degree in Mathematics and Actuarial Science, with a minor in Japanese,

from Pennsylvania State University. A Fellow of the Society of Actuaries in the USA, an Enrolled Actuary and a Member of the American Academy of Actuaries, she also has the

IEBA Diploma in International Benefits.

The corporate human resource, finance and purchasingfunctions of multinational companies are tasked withthe mission of optimizing employee benefits costs andrisks (i.e. providing the right benefits at the lowestachievable, but sustainable, overall cost). Whilecorporate HR generally focuses on ensuring that benefits are cost-effective, appreciated and competitive,corporate finance is usually concerned with ensuringthese benefits are provided at the lowest sustainablebudgeted cost. In partnership with these goals,corporate purchasing focuses on receiving the bestpossible deal for providing these benefits from therelevant vendors (administrators, consultants, etc.).

In this environment, multinational pooling is an optionthat is commonly considered and, in fact, may havealready been implemented. It is nothing new –“everyone” knows about multinational pooling.Nonetheless, I shall provide a brief definition.Multinational pooling is the multi-country aggregationof the financial results of local group benefits insurancecontracts into one experience-rated pool. At the locallevel, the benefits provided and the insurance contractsare unaffected. Yet, on a multi-country scale, it is as ifthe employer has one experience-rated insuranceproduct.

However, as local insurance markets become lessregulated and more competitive, presumably decreasingthe opportunities for global savings, what will happento multinational pooling? What will the next generation– Multinational Pooling 2.0 – look like?

A PEEK INTO THE FUTUREOf course, no one can really predict the future but, inthis article, I will look into my own crystal ball and givemy reading on what may lie ahead. To give that futuresome grounding in reality, let us first review ourunderstanding of the current picture in the context ofthe following five critical factors:

– geographic representation,– influence with local partners,– risk management flexibility,– customer service, and– frictional costs.

I will now consider each of these in turn.

Geographic RepresentationTraditionally, each network tended to focus onmultinational companies in its own immediategeography. To simplify the situation, one of the firstnetworks in the field, AIG* (and later also IGP), focusedon North American multinationals’ expansion globally inthe 1960s. Then the European networks were created,and Generali, Insurope and Swiss Life (and later All Net,ING, MAXIS and Zurich) focused on Europeanmultinationals, including the European operations ofNorth American multinationals.

All but two of the networks were based in Europe, andso were naturally strongest in Europe. AIG was a notableexception, strong in Latin America and Asia, but withouta strong network in Europe. For all the networks,expansion to other regions became a necessity as theirpooling clients expanded to different parts of the globe,and looked for similar multinational pooling services inthose locations. However, there are still gaps today,notably in Africa and in ‘less popular’ CEE† and Asiancountries.

During the last 10 years, expansion has continued at a furious pace, with the focus only on the ability to say “yes, we can provide you service in that country”.Arguably, not enough attention was paid to thestrength of that local support. Before the recentsituation with a certain ‘too big to fail’ insurer, whichhas resulted in a shake-up of its network structure,many multinational companies did not seem to be

* Formerly known as the AIG Global Benefits Network, theemployee benefit network of ALICO has signed aMemorandum of Understanding with MAXIS effectiveSeptember 24, 2009 in order for both to have alternative andsupplemental arrangements available for their existing clientsbeginning January 1, 2010.

† Central and Eastern Europe

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too concerned about the financial strength of the localnetwork insurers. Even fewer actually went beyond anetwork’s reassurance that it would complete its owndue diligence.

I can see a future where it will not be good enough toonly be strong regionally. All the networks (nine today,but perhaps only five by 2015) will be truly globalplayers by being located in, at a minimum, the top 60 to80 countries worldwide, and will be able to underwriteand pool everything from insured pensions to AD&D* ineach of those countries. A few may even be compelledto be in over 100 countries, to ensure competitiveadvantage!

Additionally, the financial health of the network insurerswill be of supreme importance. Multinationalcompanies will ask the network questions, such as“Who is responsible if a network insurer fails?”, “Howoften does the network check the financial health of itslocal non-owned partners?”, and “Can this informationbe provided on demand?”

Influence with Local PartnersThe two styles of network structures are (i) predominantly wholly owned by one or two partners (AIG, All Net, Generali, ING, MAXIS, Swiss Lifeand Zurich) or (ii) affiliation-only (IGP and Insurope).There are pros and cons to both styles. For example,wholly-owned networks may have more influence with local network partners than affiliation-onlynetworks. However, affiliation-only networks mayinvolve insurers that are more well-known (but are notnecessarily part of a global grouping). Multinationalcompanies will tend to favor the style that works bestfor their organization.

I can see a future where, despite internal structure, allsuccessful networks will have a ‘problem eliminator’available via a ‘speed dial’ button. In the future,whenever and wherever a problem pops up, whether itis in Brazil, in Luxembourg, in Kenya, or in Hong Kong,this person will make that problem go away... end ofstory. How the network is internally structured will notmatter: It is only the external result that will matter.

Risk Management FlexibilityTraditionally, the standard multinational poolingapproach was (i) stop loss or loss carry forward, and (ii) dividend paid halfway through the following year (ifone was lucky!). If the experience was positive, thisdividend would emerge. If not, a loss would be carriedforward or written off. The multinational poolingmarket was just not very sophisticated with regard tomanaging cost and risk.

In future, I expect to see a multinational pooling marketthat is much more sophisticated. Effective riskmanagement will be a key agenda topic. Multinationalcompanies will have separate risk departments andcorporate risk managers who will involve themselves with‘optimizing’ multinational pooling arrangements. Theserisk managers will want the networks to be able to fit intotheir framework, not the other way around, and they willwant options, as well as access to more imaginative riskmanagement approaches (and tools!) than simply stoploss or loss carry forward, including captive reinsuranceand administration services only (ASO).

Cash flow will be important. No company will want to wait until the end of the year (or the following year!) to receive its experience-rated dividend. New and imaginative cash-flow mechanismswill result. Additionally, many more employers will use their captive insurance companies to reinsure their multinational pooling arrangements. As moremultinational companies look at a captive solution as the next step in cost savings and control, networkswill really have to demonstrate their ability to work with captives.

With increasing globalization, multinational companieswill have more mobile workforces, and will not wanttheir employees to go through additional medicalformalities in the next country when they werepreviously covered by the very same network! Trulycoordinated underwriting and global free cover limitswill be an automatic part of the offering.

Multinational companies will want to be able to changetheir pooling networks quickly and easily, whennecessary. They will therefore want termination andtransfer provisions that are flexible enough to allow themto do so. As in any relationship, sometimes it is betternot to try to tie people down if you want them to stay!

Customer ServiceCurrently, multinational companies face uncoordinatedemployee communication between global and localoperations, varying detail and quality of annual reports,difficulties interfacing with captives, inconsistent localbenefits administration, and no guarantee of localservice. In addition, switching networks may not beeasy, leaving multinational companies completelydissatisfied with today’s pooling system.

In future, multinational companies should be able toenjoy high quality customer service at the global level,combined with high level benefits administrationservices and employee communication at the local level.

Enough information will be provided in themultinational pooling reports to allow for activemanagement of the pooling arrangement. For largerpools, quarterly updates to the annual reports will become the new norm – a service already in place (via bordereaux†) when there is risk transfer to a captive. However, written reports will not be as critical as companies will have access to real-timedata on contracts, premiums, claims, and otherinteractions.

In addition, multinational companies will have thepooling networks interface directly with their corporatebenefits databases, so that plan details aroundemployee risk benefits information are keptcontinuously up-to-date.

Local benefits administration will be subject to service level agreements in the key countries, at aminimum. Multinational companies will also have

* Accidental Death and Dismemberment† a form of reinsurance that details the history of the risk

Global Service Level Agreements (GSLAs) with theirnetwork pooling partners, where all of the above pointswill be formally guaranteed.

Frictional CostsFrictional costs are the costs involved in operating a riskbenefit program other than the cost of paying thebenefits themselves. For insured benefits, this caninclude the insurer’s retention (administration and riskcharges, reinsurance costs, etc.), brokers’ commissions,and other non-claim costs.

Traditionally, the local operations of the multinationalcompany were not forced to move to a network partnerinsurer and, instead, had to be enticed via sharing of thepooling dividend, etc. However, with no agreed globalretention levels, local operations often claimed thatthey “can obtain a lower price elsewhere!” For somereason, insurance companies outside the networkseemed to have lower frictional costs.

Additionally, it has been traditional for insurancecompanies to pay significant commissions (sometimes10% of premiums or more) to insurance brokers whointroduce business to them. These brokers frequentlyperform minimal services for the multinational companyother than assisting in the selection/reselection of thelocal insurer each year… again increasing the frictionalcost.

In future, I expect to see more multinational companieswith preferred global network providers in place.However, in return for that status, the insurance networksmust agree to various requests (multiple-year costguarantees, GSLAs, etc.). There will be more involvementon the corporate level in local premium rate setting andin correctly rating coverage, even if this sometimesmeans that the local premium must be increased.

However, in setting these premiums, multinationalcompanies will now seek full transparency of allfrictional costs. Multinational companies will expect tobe able to benefit from global negotiating and buyingpower and, in this new partnership, will expect to no

longer pay brokers’ commissions. In addition, they willwant transparency in being able to understand, andnegotiate, central and local retentions.

THE FUTURE UNFOLDSThe picture is now complete and, as I continue to gazeinto my crystal ball, you now see what I see:

Fewer truly global networks. There will be only four to sixeffective global networks in a much more competitiveand efficient market. The remainder will either becomeniche players (disability specialists, Latin Americaspecialists, etc.) or disappear. The global networks thatremain will provide a good match against mostmultinational companies’ global locations, and will meetminimum requirements for financial strength.

Proven ‘problem eliminators’. These effective networkswill be able to demonstrate a methodology for solving problems effectively, and will have a proven‘problem eliminator’ as part of their teams.

Creative risk management approaches. Multinationalcompanies will be given access to a complete range ofrisk management approaches, including captivesolutions for large clients, combined with expandeddata capabilities and cash-flow mechanisms.

High quality service. Companies will have online access toreal-time data, claims and reporting, plus measurableglobal service standards.

Transparent and negotiable frictional costs. Networks willguarantee competitive rates locally, plus local dividendflexibility and competitive expense and administrationcharges globally. For many companies, brokers’commissions will be a thing of the past!

In essence, Multinational Pooling 2.0 should providemultinational companies with much more than most havetoday. While there may be less choice on one side withfewer networks, the new effectiveness of the remainingnetworks will provide the chance of attaining an elusivetarget… a true partnership! Ω

Reproduced from Benefits & Compensation International, Volume 39, Number 5, December 2009.Published by Pension Publications Limited, London, England.

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