The Future: from thought leaders: Pools rippled by different strokes

2009-01-27

Paolo%20Marini This article is brought to you by Generali

Minimising employee benefits risk liabilities will be a priority for international corporations, says Paolo Marini, GEB sales and marketing director at Generali

It is perhaps understandable one of a finance director’s primary concerns will be that the company is protected from the financial strain of hefty insurance claims. What may seem like a straight forward request, however, often turns out to be just a small part of a more complex picture.

Although international corporations are unlikely to be brought to their knees by an employee benefits related claim, there are a number of factors they should consider to minimise their exposure to costs associated employee risk liabilities. More often than not, transference of employee risk liability is largely driven by operational factors, such as competitors’ practices, fiscal advantages and lack of in-house expertise or resources. Occasionally it boils down to an employer’s understanding of what has come before, rather than a pro-active decision. This is because a corporation may simply be insufficiently equipped to challenge or reshape a long established process.

In reality, employee benefits risks (death, disability, accident and healthcare) are fairly predictable. For instance for every 100 EUR, USD or GBP in premiums, around 60% would normally be paid out for death claims, 75% for disability, 90% for healthcare or around 35% in the event of an accident. Of course, these average figures may be contradicted by a company’s specific experiences or location but globally they will invariably prove to be reliable long-term indicators of how such claims dealt with.

International corporations, however, can claw back some of these costs by setting up a multinational pool. Once elements, such as insurers’ profit, risk charges, intermediaries’ fees and local profit sharing are factored in, a credible portfolio will yield around 10% to 15% reimbursed as dividends to employers that maintain multinational pools.

Although compensation and benefit professionals have traditionally been the originators of multinational pools, procurement, finance and risk professionals are now becoming increasingly engaged in the process.

Compensation and benefits professionals mostly view employee benefits as a component of remuneration, promoting workforce loyalty and positioning the company as an employer of choice. As such they tend to demand core engagement in the plan design and financing process. Procurement Managers on the other hand view employee benefits as a commodity best bought in bulk, which insurers should be left manage. On the contrary finance and risk managers see equity best invested in-house.

Most international benefits programs today are multinational pools of one type or another. It’s becoming more common, however, to see traditional approaches to pooling becoming steadily eroded at the fringes by the adoption of new and flexible methods. These include a technique used to eradicate risk completely, where corporate buyers approach insurers as vendors to obtain the highest possible service at the lowest possible price, negotiating both centrally. Another option involves the full transfer of risk. This is when risk and finance managers seek to underwrite all corporate risks, relying on insurers as partners for advice, service and administration.

Captives, wholly or part-owned, or rented enterprise, designed to insure an employer’s own risk are increasingly being used. The principle, however, is the same, to be one’s own insurer, for the sake of cost efficiency as well as information control, and alignment of compensation with other corporate risks.

While the shape of employee benefits may not alter dramatically overnight, it will certainly flatten in years to come with fewer traditional pools, and more alternative approaches at either end of the spectrum, prompted by a more conscious use of corporate resources.

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