Pooling Markets in 2018 – A Position Paper
Chief executives of the multinational pooling networks meet from time to time to discuss general industry trends, and recent discussions focused on the future of multinational pooling and how to grow the market for global solutions offered by the multinational networks. While the structure and focus areas vary between the networks, there was consensus on a number of issues relating to the current state of the market.
Multinational pooling has existed for more than 50 years, resulting from the need to provide multinational corporations (MNCs) with global coordination services for their local employee benefits and a means of controlling costs. Employee benefits remain attached to each local jurisdiction for regulatory, legal, compliance, tax, social, or servicing considerations, resulting in a high degree of complexity that pooling networks and global advisers help address.
Global brokers and consultants have, over the years, taken the initiative to stimulate changes to the basic product to cover different risk management appetites, cultures or needs of MNCs. The networks applaud these initiatives and have enhanced their product ranges to cater for different needs by adapting a traditional product for more sophisticated funding and servicing solutions.
But the demand has changed – especially in the last 15 years –from “basic pooling” to continued enhancement of pooling solutions, and captive reinsurance for a select number of larger and more centrally-managed companies. Global pricing has also evolved for an even smaller pool of larger companies that have the power to influence their subsidiaries’ buying decisions. Pooling remains a preferred solution for many multinational companies.
‘A pooling network is fundamentally a service company that opens doors to local services and insurance carriers all over the world, collects data, and provides analysis and intelligence to its clients.’ – Mauro Dugulin, MAXIS
‘Pooling is of great value for the majority of multinational firms, great or small, whether they realize it or not at this time. Of course, the international dividend is always very important. It guarantees that the client pays a fair price and the risk carrier keeps a fair margin at the same time. This is how a strong, steady, and mutually beneficial business relationship can be built. On top of a fair price for both parties, services such as financial sustainability, compliance, data and information, and global benchmarking are gaining ever greater importance’ – Ludovic Bayard, GEB
‘Pooling as a product within AIG has advanced and become more standardized in recent years; we see a trend towards more global underwriting and captives that are very much bespoke solutions. But whatever the product may be, there is strong client demand for detailed information about the underlying risks, both in terms of claims details and frequency.’ – Roland de Crombrugghe, AIG GBN
‘The focus has shifted from the dividend, which is still there but is becoming less important in relative terms, whereas data, information, and insight has become the name of the game.’ – Peter de Vries, IGP
‘… we as an industry must focus more on brand new business, as opposed to fighting over the existing user base in order to expand the market for multinational pooling solutions to a wider segment of the market.’ – Morten Unneberg, Insurope
‘… the entire pooling industry, along with the large brokers and consultants, have chased the same list of large multinational clients and prospects, year after year. With more than 50 years of experience and valuable data collected from all over the world, services from global networks add a lot of value also to smaller multinational companies. We can contribute with much more than performing “network searches” and sharing information of existing client relationships.’ – Michael Hansen, Swiss Life
The market has also seen the emergence of new requirements from MNCs. For example, clients demand more detailed and more frequent data and detailed claims information, as well as timely quarterly reporting. Another important development is the desire to reduce global employee benefits costs through advanced analytics, wellness programs, and other risk mitigation techniques. Finally, online access to digitized information, tailored for HR departments, employees and dependents, is fast becoming prevalent via smartphones, tablets, PCs and apps.
The number of MNCs actively engaged in global agreements of any sort has remained essentially stable for the last couple of decades with CAGR of 2% over the last 15 years There aren’t enough new companies entering the market.
It’s fair to say that the advisor community, as well as the networks, could have been more focused on expansion of the market, by raising awareness of pooling and education of the market. Attention has been concentrated on the same group of 500 or so MNCs. and trying to optimize something that already exists. This reduces margins for insurance providers, multinational networks and their partners, by just moving business from one provider to another when the real wins come from a larger market, thus affording more potential to invest in the future for the provision of data, reporting and service.
Contrasting with past practice, the networks need to work with the consultants to raise awareness of pooling and the benefits it offers to MNCs in order to expand the market beyond existing multinational pooling customers.
While optimization and synergies are healthy, there is only so much that can be achieved if the potential group of “buyers” does not grow. Providers continue to be pressured to lower costs, resulting in reduced administrative fees and lower technical margins. The degree to which a multinational arrangement needs to be profitable for the provider depends on the structure of the network, but certainly, such an arrangement needs to be sustainable in the medium to long term.
There is a need to challenge those who promote the belief that insurers are retaining huge profits that MNCs leave on the table. While this may have been the case several decades ago, due to tariff rate countries and a lack of global coordination, it is by no means the case today. Local premiums being paid by those MNCs’ subsidiaries (of companies that are already clients) have reduced over the years, meaning that the returns that can be achieved through a global program have been reduced and to a large extent been translated into a reduction of the up-front cost. Combining coverages internationally certainly continues to deliver further savings, but there’s a limit to how much can be achieved.
All global networks strongly believe that service, coordination and reporting should be valued as equally important as financial savings in a world where data and reporting is the key to understanding and managing one’s assets. This, however, comes at a price.
Considerable resources are brought into play by the pooling networks, such as licensing to operate in full compliance with local laws and regulations in 100+ countries, general expenses required to fund a skilled international workforce and invest in new IT & technology, dedicating capital to fund a global activity that is acknowledging drastic changes impacting its business model (longevity, stress at work, pandemic risk, terrorism, climate change, cyber risks …). These are things that should be appreciated as necessities and as added value, rather than seen – as is too often the case – as “frictional costs”.
’After several decades, multinational pooling is quite mature as a product. However, for many customers that are highly decentralized, pooling products need to evolve and innovate. In general, pooling calculations are viewed as complicated and must be simplified if we are to address new client segments that may not be prepared to invest in highly specialized resources or expertise’. – Wendy Liu, Zurich Global Employee Benefits Solutions
’Of course, dividend rates have diminished from 25-30% in the 1970s to around 10% today, but year after year, 99% of our clients carry on with pooling , and they do so because they still see the value in pooling, both the financial value and the other benefits pooling offers like high limits without medical evidence and of data, coordination services, amongst other. Also, lower dividends in the majority of cases do not translate into higher cost because the upfront cost is often lower. We also see an increased interest from smaller and mid-size companies to start pooling arrangements’ – Morten Unneberg, Insurope
’Maybe it is also a question about how “pooling” is actually defined or what it brings in addition. Is it just about dividends and reporting, absolutely not! I believe that the majority of the pooling clients value expertise, advice and the relationship with their network much more than the potential financial benefits’. – Michael Hansen, Swiss Life
’The industry is likely to see greater consolidation since success in the future requires investments and commitment on the part of network owners.’ – Mauro Dugulin, Maxis
‘Consolidation in the insurance industry continues unabated and that – along with changes in corporate strategies – may result in the disappearance of the unsustainably unprofitable networks and/or in mergers, reducing the breadth of the market.’ – Peter de Vries, IGP
‘Unsurprisingly, with lower pooling dividend rates and increasing governance and compliance requirements, the dividends/savings argument, whilst still dominant, is being complemented by information, plan data/reporting, and improved service as key reasons to set up or to keep a pool running’. – Wendy Liu, Zurich Global Employee Benefits Solutions
‘Until now, all market participants – insurers, networks, brokers, and consultants – focused too much on “jumbo” accounts, i.e. the top 500 global corporations. As technical margins have reduced in that segment, we need to enlarge the cake and attract smaller firms to multinational pooling’. – Ludovic Bayard, GEB
The networks believe that the community of insurers, global networks, and advisors, needs to focus their attention on growing the demand from MNCs that have not yet given adequate attention to managing the financing of the employee benefits coverages of their subsidiaries around the world. They believe that this is where the most meaningful savings can be achieved.
This is not to say that existing clients of the Multinational Networks do not have more work to do. There is certainly a lot of scope for additional savings there, but this is primarily in addressing the coverages that are not yet participating in any international arrangement, rather than moving business from one network to another.
The Long-Term View
The networks envision a truly three-way partnership, rather than individually seeking out quick wins for the short term. To that extent, they see that partnership as an arrangement that fits the needs and objectives of each of the stakeholders:
- Clients (MNC parent organizations + subsidiaries + employees/plan members)
- Insurers and global networks
In fact, addressing new requirements from MNCs can hardly be achieved outside of a partnership approach.
For example, the demand for more detailed and frequent data requires MNCs to choose insurance suppliers capable of transmitting detailed claims information promptly; advisors and global networks to make the data available in a coherent manner, enabling analysis and making recommendations; and insurers to settle claims with minimal delays. For an information system to work well, it needs to be designed in partnership, always keeping the MNCs’ ultimate goals in mind.
Another illustration of the importance of working as partners lies in the control of medical costs which requires advanced analytics to understand what is going on, tailored communications to help shape employees’ and employers’ expectations and actions, and wellness programs to influence individual health behaviors. All these components must work together in order to reach desired outcomes and this is best achieved through partnerships where responsibilities are apportioned in the most efficient way.
In addition, employers and employees alike have a strong dislike for having to access a multitude of applications or websites to get hold of information pertaining to their employee benefits plans. Running a common information platform requires working together in a partnership that includes the MNC, the advisors, the TPAs, the insurance carriers, and the networks.
As the networks see it, pooling can continue to grow on the back of new large multinationals from Asia and Latin America and by developing the middle market in the USA and Europe. This requires investing in educating market participants – in particular intermediaries and HR leadership.
After fifty years of service, one thing is certain: insuring risk requires proper pricing and underwriting, mutualization, and spread of risk. In order to make this sustainable in the medium to long term, it is time to start seeing global arrangements as tools for global data and reporting, where governance and risk management programs require active management from the client, rather than relying on “pools of convenience”.
Think about fire and explosion, or business interruption, and the role of risk engineering whereby insurers assist their clients in preventing hazards up front – as opposed to shelling out money when something has happened. We believe the same is happening or must happen in employee benefits – see the current trend in wellness/wellbeing initiatives. Of course, it is doctors not engineers who do the job, but the underlying thinking is the same’. – Roland de Crombrugghe, AIG GBN
‘Clients want assurance that local plans are in compliance with all applicable laws and regulations; and they want both financial strength and reporting capabilities to be guaranteed by one single counterparty as opposed to having to deal with multiple, unfamiliar providers around the world’. – Ludovic Bayard, Generali GEB
‘What clients really expect from us nowadays is more data to feed into the management and governance of their employee benefit plans.’ – Mauro Dugulin, MAXIS
‘Multinational organizations and their needs are changing; intermediaries as well as insurance carriers need to look for new ways to address the changing markets.’ – Wendy Liu, Zurich
‘… pooling will continue its steady growth, driven by young large multinationals from Asia and Latin America [who are] setting up their multinational pools, and by the development of the middle market in the USA and Europe. That is provided that we, as an industry, succeed in educating the market, including insurance intermediaries. To that end, we need to get the message about pooling across to HR leaders in a trusted way.’ – Morten Unneberg, Insurope
‘There will be continued demand for pooling, for international dividends, for risk coverage; and at the same time, for more data, more reporting, more employee communications, more benchmarking… Employers need to benchmark their plans against their peers and employees should get benchmarking information to assess how rich their plans really are.’ – Peter de Vries, IGP
‘For our market to be sustainable, clients need to recognize and make better use of the networks’ capabilities, for example, accessing relevant claims analytics and data, as opposed to focusing on price only. Networks can be of great help in coordinating local capabilities and in helping define global company-wide employee benefits strategies.’ – Wendy Liu, Zurich Global Employee Benefits Solutions
‘… the market, to this day, remains woefully underserved – and there is room for all players and for all solutions: captives, global underwriting, pooling – and for ideas yet to come!’ – Michael Hansen, Swiss Life
One also needs to see service and coordination as a way to add value, rather than engaging in exercises purely for procurement, that are aimed only at reducing the company’s insurance spending over the next one to three years.
The potential market for pooling consists of the vast majority of multinational organizations. It continues to grow and at the same time, remains largely untapped. As a result, pooling definitely has a great future, alongside other optimization tools such as captives, global underwriting, and other, still to be invented solutions. And there is room for all players, consultants, brokers, and networks alike, to add their distinctive value to the management of employee benefits on a global basis.