MULTINATIONAL POOLING Optimizing the Management of Global Employee Benefits

The Prudential Insurance Company of America (Prudential) Newark, NJ

0284622-00001-00

2

INTRODUCTIONUntil recently, the term globalization was used almost exclusively by economists, political scientists, and investment bankers. Today, globalization

is a part of everyone’s daily life. Colleagues can be on the other side of the world as often as they are on the other side of the cubicle wall. Products,

money, and information move in ways not even imagined just a decade ago, which has created an explosion in global commerce.

In many cases, multinational companies do not have an efficient, economical, and reliable method for managing employee benefits on a global

basis. One solution to consider is multinational pooling. Multinational pooling is an accounting mechanism coordinated by a pooling network.

When a multinational company enters into a pooling arrangement, the financial results of the various participating local insurance carriers are

pooled together for financial accounting purposes. This financial arrangement may create several advantages for an employer.

This white paper will outline the challenges of providing employee benefits globally, the advantages of multinational pooling, and the mechanisms

that make it work.

3

MULTINATIONAL POOLING: PROVIDING LOCAL BENEFITS GLOBALLYWhat Are the Specific Challenges Facing Multinational Companies?

Companies operating in more than one country encounter a broad

range of obstacles including:

uu Multiple Subsidiaries—Tracking various benefits programs

at each entity can be daunting and time consuming.

uu Different Providers—Each country will have its own insurance

carriers, and may have different providers for different coverages.

uu Variable Programs—Coverage and plan designs will vary by country,

and it is unlikely that a single provider will understand the benefit

nuances of multiple countries.

uu Claim Experience Fluctuations—Poor claim experience in one country

can cause large rate increases or will make it difficult to recoup

financial losses. When global risks are fragmented, clients cannot

benefit from economies of scale.

uu Legislation and Regulation—Countries have different

regulatory environments that constantly change and must be

monitored for compliance.

uu Different Social Systems—Local cultural attitudes and different

nations’ social security systems affect benefits decisions. For

example, a typical life insurance benefit for the United States

may not be appropriate in a developing nation.

uu Multiple Monetary Situations—Different currencies make it difficult

to provide accurate global financial information.

uu Individual Local Advisors and Brokers—There may be multiple

advisors at the local level; no single advisor is in a position to

provide a global perspective.

uu Lack of Global Expertise—The home office may not be well versed in

global employee benefits or the company may have added operations

in a new and unfamiliar country.

uu Corporate Governance—Sarbanes-Oxley legislation in the U.S.

mandates that senior executives take individual responsibility for

the accuracy and completeness of corporate financial reports for

U.S. public companies. Reporting becomes more challenging when

you have international locations and multiple currencies. Similar

legislation is being adopted abroad.

What Are the Benefits of Multinational Pooling?

Multinational pooling addresses all of these challenges. With

multinational pooling, global companies can work with a network of

admitted carriers, view valuable information, improve cost controls,

and have access to enhanced employee benefits.

Access to Global Coverage on an Admitted Basis

A pooling network acts as a conduit to help global companies secure

local benefits through the market-leading admitted carriers. These

admitted carriers are licensed to do business in their respective

countries. Local company managers and employees interact only with

their local carrier. Premiums and benefits are paid in local currency,

and claims are filed locally.

Since all coverages are provided by local admitted carriers who

understand the customs and laws, it is much easier to avoid regulatory

problems. Conversely, companies that purchase benefits coverage

through non-admitted carriers may face significant risks. For example,

there are potentially negative legal and tax consequences when

insuring foreign nationals under a U.S. benefits plan.

4

Improved Global Employee Benefits Information

The multinational pooling network provides comprehensive global

reporting to its clients. Because the cost of providing employee benefits

is such a significant expense for all employers, this reporting capability

is an extremely valuable component of multinational pooling.

Each client receives an annual consolidated report that provides

an overview of their global benefits expenditures in both local and

common currency. The report also includes the following specific data:

uu Information on the benefits provided by each network associate

insurer in the pool

uu A summary of the pool’s historical performance

uu A history of premium costs, claims processed, and retention

uu A chronology of the benefit coverages added or removed from

the pool since inception

Data from each network associate insurer is provided in the local

currency for each local subsidiary. There is also a summary at the

beginning of the report that shows total premium and expense in the

currency selected by the employer. This report helps a multinational

company overcome the challenges of monitoring employee benefits

for multiple subsidiaries, and dealing with various providers and

programs in different currencies.

In addition to reporting on benefits, the pooling network also gathers

and provides valuable profile information on each country where there

is an associate insurer. These country profiles highlight economic

developments, outline available employee benefits, and track major

employee benefits trends. Both the multinational company and the

local subsidiary can use this data to gain a better understanding of

employee benefits in individual markets and to make prudent

business decisions.

Potential for Lowering Benefits Costs

Multinational companies that contract for their global benefits through

multinational pooling may be able to reduce their overall benefits

expense. The reduction could come in the form of an international

dividend. At the end of the year, each local plan’s experience is

aggregated and included in a global experience report, produced by the

pooling network, to determine if an international dividend is available.

International Dividend Based on Favorable Experience.

This multinational company has subsidiaries in three different

countries: the United States, France, and Spain. The company

provides group life insurance coverage for employees in all three

countries. The following table illustrates how a multinational pool

can produce an international dividend. Results are shown in a

single currency.

The experience in the United States and Spain was positive, while

the experience in France was negative. At the end of the year, the

net positive funds are returned to the company as the international

dividend for that year.

United States France Spain Totals

Premiums $200,000 $100,000 $150,000 $450,000

Retention ($20,000) ($10,000) ($15,000) ($45,000)

Commissions ($10,000) ($0) ($5,000) ($15,000)

Claims ($125,000) ($160,000) ($30,000) ($315,000)

Net Dividend $45,000 ($70,000) $100,000 $75,000

5

Corporate headquarters has the option to keep the full dividend

or share the funds with its subsidiaries. Even when the positive

experiences of multiple subsidiaries are not sufficient to generate the

international dividend, they may still offset a portion of the negative

experiences of other subsidiaries. In years when the total negative

experience creates a shortage for that year, the shortage can be carried

forward into the next year, with the potential to be offset by future

surpluses. If a stop-loss provision is in place, the shortage is forgiven

in the year in which it occurs.

The large number of covered lives in a multinational pooling contract

is an additional factor that may reduce benefits expenses. Since lower

retention factors may apply when calculating global retention, a larger

surplus may be available to headquarters.

In addition to global retention being lower, multinational pooling helps

smooth the highs and lows of claim experience over a larger global

population. A principle known as the Law of Large Numbers maintains

that the larger the group, the more predictable the experience. While

the gains and losses of one country can fluctuate greatly from year

to year, the total gains and losses of twelve countries would be much

more predictable.

With a multinational pooling arrangement, there are three

opportunities to reduce benefits expenses:

1. Positive experience may provide an international dividend.

2. Economies of scale may reduce the global administrative expense.

3. Lower global risk may result in a reduced international risk charge.

Enhanced Benefit Offerings

As part of a multinational pool, companies may be able to provide

benefits to their employees that are superior to benefits they could

offer otherwise. The larger number of employees receiving benefits

through a pooled arrangement might result in the availability of higher

guarantee issue amounts for all employees, depending on the

pooling network.

Participation in a pooling network can persuade some participating

local carriers to reduce their minimum requirement for the number

of lives covered. For example, a technology company based in San

Francisco may want to open a small manufacturing plant in Singapore.

If the number of lives in Singapore is below the local associate

insurer’s standard requirement, the Singapore carrier may be willing to

cover those employees if they are part of a multinational pool.

These enhanced benefits may very well prove important to both the

subsidiary and the controlling company. A global economy also means

global competition, so companies need to secure advantages in every

way possible.

6

HOW MULTINATIONAL POOLING WORKSMultinational pooling is a financial mechanism that allows a company to

combine the financial results of its local insurance contracts in order to

gain the advantage of global financial accounting and reporting. Several

multinational pooling networks are currently operating throughout

the world. Each one consists of an affiliation of independent or owned

insurance companies who have signed contracts to share their results

within that pooling network. An individual insurance company may

participate in several pooling networks.

First and Second Stage Accounting

Multinational pooling employs a two-stage accounting system to

determine results. In the first accounting stage, we see each country’s

individual results. The simplified calculation is Premium minus Claims

minus Retention equals a Dividend or a Deficit. At the end of the year,

each associate insurer in the pool reports these results to the pooling

network. The network uses these results to calculate the second

stage accounting.

In the second stage accounting, also known as the global experience

report, the combined local results are used to calculate Total Premium

minus Total Claims minus Reduced Global Retention to equal the

International Dividend or Deficit. The following examples illustrate the

first and second stage accounting processes:

Second Stage Accounting

Total Premium $600

Minus Total Claims $420

Minus Global Retention* $100

International Dividends or Deficit $80

* Lower retention factors may apply when calculating Global Retention, because financial accounting risk is shared across a larger population.

First Stage Accounting

Country A Country B Country C Total

Premium $100 $200 $300 $600

Minus Claims $80 $140 $200 $420

Minus Retention $40 $30 $50 $120

International Dividend or Deficit*

$(20) $30 $50 $60

* Without Multinational Pooling, the local insurance company either benefits from any surplus (Underwriting gain) or absorbs the losses from the local plan.

When second stage accounting produces a surplus, the multinational

company will receive the international dividend. When it produces a

loss under a loss-carry-forward arrangement, the deficit is carried

forward to the next year to be recouped from subsequent years’

surplus, if any.

Some multinational pooling arrangements may also include a

stop-loss provision. In those cases, the deficit is simply forgiven in

the current year.

The treatment of dividends and deficits depends on the pooling

system selected. The results of the second stage accounting process

are presented to the company’s headquarters in their year-end

consolidated report.

Eligible Coverages in the United States

U.S. benefit plans may pool employer-paid coverages for life,

short-term disability, and long-term disability insurance. To prevent

commingling of employer and employee funds, no employee-paid

voluntary plans are allowed in a pooling arrangement. If voluntary

plans were included in the multinational pooling arrangement,

there would be no practical method for differentiating the dividends

generated by employer contributions from those associated with

individual contributions.

Pooled coverages must be written on a self-supporting basis, which

creates the opportunity to provide a dividend for the pool.

7

WHY CHOOSE PRUDENTIAL FOR MULTINATIONAL POOLING?We Provide Access to the Two Leading Networks

Prudential is the exclusive U.S. associate insurer of the two leading

multinational pooling networks: Insurope and IGP. These networks

provide flexible solutions and partner with top employee benefit

insurers in local markets around the world. Both networks have been

operating for more than 45 years and work with affiliated carriers in

over 65 nations.

We Help Clients Optimize the Global Benefits Experience

Prudential’s Advanced Markets Group provides products and solutions

to help clients fund employee benefits. This unit has the experience

and resources to provide products and solutions tailored to each

client’s individual needs. These solutions address risk management,

cash flow, and benefit security; and incorporate life and disability

coverages that are core products for Prudential. The Advanced Markets

Group also coordinates with Prudential’s Group Insurance Sales and

Account Management and our network partners to deliver seamless

account management services to each client.

We Have the Strength of the Rock1

Insurance benefits are only as dependable as the company that

writes the policies. Prudential is one of the largest financial services

companies in the United States and in the world.1 We have operations

in the United States, Asia, Europe, and Latin America. We also have

one of the most recognized and trusted brand symbols: The Rock®,

an icon of strength, stability, expertise and innovation.† In the Life

and Health Insurance category, Prudential Financial was rated

3rd in the “Insurance and Health” category of Fortune® magazine’s

2015 list of the “World’s Most Admired Companies®” *

For the most recent ratings, please visit www.investor.prudential.com.

For More Information on Multinational Pooling

Contact your Prudential Representative. He or she will coordinate

with the Advanced Markets Group to provide the specific information

you request.

1 Our Company, www.prudential.com 2015

† 2015 Annual Report, Prudential Financial, Inc.

* FORTUNE® magazine, March 1, 2015.

Prudential is not authorized to give tax advice. Please consult a tax advisor.

Group Insurance coverages are issued by The Prudential Insurance Company of America, a Prudential Financial company, Newark, NJ 07102. The Booklet-Certificate contains all details, including any policy exclusions, limitations, and restrictions, which may apply.

© 2015. Prudential, the Prudential logo, the Rock symbol, and Bring Your Challenges are service marks of Prudential Financial, Inc., and its related entities, registered in many jurisdictions worldwide.

192209

www.prudential.com