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It would be insulting to issue an article aimed at finance directors without any facts and figures. It is a widely held assumption that employers spend on average $500 per employee, per annum on employee benefits. For a multinational company with 5,000 employees worldwide, that translates into a premium of $2.5 million. So if a 10 per cent saving could be made through either up-front discounts or international profit sharing of the overall experience, this would mean a potential $250,000 saving.

Before describing the main tools available to obtain this substantial saving the following few paragraphs help to explain the context and definitions.

Employee benefits (in its broad definition: Pension, Survivors’, Life, Disability, Accident and Medical benefits) are a sensitive issue where both financial and human aspects have to be taken into consideration. This requires a shared decision process involving management, human resources and the financial director. The degree of contribution from the various parties will vary depending on the size of the company, its philosophy and its national or multinational character.

The management needs to set up a clear and well-understood benefit strategy (salary component: fixed, variable, bonus and fringe benefits: holidays, pension, risk and medical cover) to be competitive within the market/industry practice and attract/retain a good workforce.

The Human Resources department needs to comply with local legislation and be involved in the benefit design and promises (level of benefits, eligibility conditions, etc). Although previously HR have usually occupied the driving seat in this project, finance directors nowadays appear to have an important role in the selection process and the financing method, due to a variety of reasons, including:

• Economic (in periods of downturn, all cost savings are welcome and encouraged) .
• Accounting (focus on FRS17 / IAS19 debate is highlighting the importance of employee benefits like pension and the relevant liabilities at stake).
• Cultural (globalisation increases pressure on the parent company to offer consistent benefits).

We can now describe the different products available as follows:

• Multinational pooling arrangement is an agreement between the head office of a multinational company (ie present in at least 2 countries) and an insurance network, which allows – at an accounting stage – the consolidation of the worldwide experience. After one year, the company is provided with an international profit and loss account with details of:

• Incoming items: premiums paid in each country, investment income.
• Outgoing elements: claims paid, reserves, broker commissions, administrative charges.

• When the balance is positive, the so called international dividend is – partially or fully – paid back to the company; whilst if the balance is negative, the amount is either fully absorbed by the network or carried forward depending on the loss treatment selected by the company. There are several advantages for the multinational company:

• Better management of the worldwide risk and improved reporting.
• Up-front local savings due to economies of scale and potential international dividends.
• Improved local terms & conditions (free cover limits, waiving of exclusions) thanks to network leverage.
• Easier transfer of employees (mobile employees) within the entity (continuity of cover).
• Reinsurance protection (excess of loss/stop loss) against individual peaks or catastrophic events.

To make this arrangement efficient, involvement and co-ordination from the parent company is necessary. In particular, a clear explanation of the project and its benefits to the parties (local subsidiaries & head office) must be spelt out to overcome any potential local issues (existing commercial relations with the current local provider for instance). To make the process easier, it is usually agreed between the network and the parent company that no worse term conditions would be offered. A percentage of the international dividend can also be paid back in proportion to the share of the pooling arrangement to the participant subsidiaries as an incentive to join the group guideline.

Insurance companies – usually being in the market to make profits – also have interests:

• New production and distribution of business towards network partners.
• Spread of risk and increased exposure leading to a better portfolio credibility.
• Long-standing relations with clients less subject to local volatility of relations.

In the last ten years, there has been a noticeable trend of multinational companies moving towards a further stage: ie reinsurance to captive arrangements. In this case the insurance provider is used as a fronting provider (for underwriting, tax or administrative reasons), while the employee benefit risks (eg survivors’, life, disability, accident, medical) are partially or fully ceded to the captive company.

Experience shows that a multinational corporation already using a captive company for its property and casualty risks, and which may already have one or more multinational pooling arrangements for its employee benefits, can save a further 6 per cent to 11 per cent of the total premium by switching to a multinational captive arrangement.

This is achieved through local competitive terms & conditions, elimination of the risk charge (the risk is borne by the captive company), and improved cashflow. Obviously, it will depend on the number of countries involved, the split of cover and the total volume of insurance premium. By rule of thumb, we can say that a multinational company with more than 3,000 lives and annual premiums above $1 million can potentially achieve some savings through a reinsurance to captive scenario.

Few network providers are fully equipped to deliver the service requested as various requirements are necessary:

• A life insurance network must be present in all or most of the countries where the corporation has subsidiaries.
• Its experience, technical know-how, and range of products must be top of the range.
• Lastly and most importantly, it must be willing to front the corporate’s captive and provide a seamless and timely flow of information and reinsurance to the captive.

In a typical reinsurance to captive scenario, the balance (incomings less outgoings) is paid on a quarterly basis meaning that if the premiums are paid annually in advance in January, a first payment can be processed in April of the same year. The captive company is then able to fully realise the cashflow impact by investing the quarterly premium amounts.

At this stage of the article, it would be misleading to have drawn your attention only to the advantages of these programmes without mentioning some words on risk management.

The key to a profitable pooling or captive arrangement for all parties (local subsidiary, head office and insurance network) is the network’s capacity to provide timely portfolio management in assessing on a regular basis, the claims experience cover by cover/country by country and taking the appropriate steps where necessary. Loss-making countries, in particular, need to be monitored and a change of benefits (deductible, co-payment) or premium increases might be introduced to address a loss-making situation.

A negative scheme which is not managed properly, will undoubtedly have difficulty in obtaining local terms & conditions from any provider if the benefit design is not adapted to the loss experience at any point in time. This is true in a multinational pooling or captive scenario but also in a purely local scheme situation.

During this sensitive negotiation process, support from all sides (HR and risk mangers or finance directors) is vital to successful risk management.

It is worthwhile mentioning in conclusion that a multinational reinsurance to captive programme or a pooling arrangement relies on a long-term relationship between the corporation and the insurer. Through such a positive relationship – and the teamwork which is at the base of it – the corporation will not only enjoy the best possible financial deal, but it will achieve considerable ‘peace of mind’, knowing that its worldwide personnel are fully taken care of within its employee benefits programme. Above all, the administrative burden of having to constantly review the local insurance carrier can be totally avoided.

One final point, which should convince those readers still reluctant, is that all the above mentioned international products are set up at no additional cost. 

(This article was originaly published in Director of Finance 2004 edition)