All in this together

Multinationals offering employee benefit schemes should consider pooling their local insurance contracts to help cut costs and reduce risk, according to Zurich Life Insurance’s Jean-Luc Braegger

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Multinational firms have many pitfalls to negotiate when it comes to employee benefit schemes. An increase in regulations, at both local and international levels, means that many organisations are required to provide their employees with a minimum level of specific benefits per territory.  Managing these programmes across many countries and catering for the nuances of localised laws can prove complex.

European CEO spoke to Jean-Luc Braeg-ger, from Zurich’s life insurance business, about what benefits companies should offer their employees, and how they can manage the complex schemes across different countries.

What is the best form of employee benefits?
As part of a total compensation package, companies provide their employees with different types of benefits. Insured benefits are an important part of this package – and because of labour laws, some of them are even mandatory. As an insurance company, when we talk about employee benefits, we think about the risk coverage and pension provision. In insurance terms, many things are covered, including death, disability, accident, medical or health costs, but actually employee benefits can go much further. There are fringe benefits, like company cars, day-care vouchers or wellness programmes, for example. I wouldn’t say there is a best form of employee benefits. Nevertheless, the offering needs to be both competitive in the marketplace and meaningful to the local employees, while being affordable to the employer.

Do regulators put pressure on companies to offer better deals to their employees?
Not directly, but changes in regulation can impact the structure of benefits provided. Think about pension schemes, for example, 20 years ago, most schemes were set up on a defined benefit basis. A combination of economic environment and regulation has led many firms to switch to defined contribution schemes. New regulation, such as Solvency II, might drive this process even more in the direction of defined contributions. So while Solvency II does not directly impact the employer, it might well affect the design, nature and price of benefits offered by the insurance market. More and more companies are therefore considering an alternative benefit design.

Why don’t companies simply offer one global benefits scheme worldwide?
If you look at insurance solutions, everything is driven locally. Not just because of labour laws and labour agreements, but also because of regulations, which define what type of insurance solutions are tax deductible. Depending on where your operations are, you need to provide employees with local solutions.

Because of all the country-specific elements that need to be considered, HR departments often handle benefits locally and don’t tend to look at them from a global perspective. Zurich offers multinational solutions that combine this local approach with the global corporate interest by consolidating risk benefits of the local schemes into a global account or pool.

What do you mean by a ‘pool’?
You can think of a pool as a virtual insurance company set up for a multinational company. All the local schemes offered by our network insurers are put into a pool to take a global view of the claims experience from each location. By looking at the local schemes in consolidation, you can achieve savings because of an increased risk spread. If the claim experience is favourable, an international dividend is paid out.

In addition to helping companies optimise the financing of their employee benefit schemes, pooling also provides transparent, detailed management information, which can lead to improved oversight and governance. Another positive feature of pooling is that it allows the network to waive underwriting requirements such as medical evidence up to a certain limit, which is usually higher than what could be offered locally without pooling.

How mature is multinational pooling?
There are about 3,000 pools, held by more than a thousand companies worldwide. If you consider that there are about 70,000 multinational companies around the world, you can see the potential. So the basic and relatively easy idea of pooling has not been fully exploited, even by those with existing pools. There is a large potential here for organisations to reduce costs and improve governance.

Are there further opportunities?
Some of the larger multinationals have taken pooling one step further and are now insuring their benefits on their own. Because of their size and financial strength, large multinationals can afford to bear certain risks themselves. They cannot, however, set up self-insured solutions in every location, so they set up a captive, which is a company-owned insurer or re-insurer, to insure those risks. Obviously, such a solution is only for large companies, which have a certain risk appetite and are experienced in analysing such risks.

Captive programmes are relatively unexploited, with only about 80 such programmes worldwide. One of the reasons for this low number is that employee benefit schemes have traditionally been handled by HR departments in isolation, disconnected from risk management. More and more we are seeing a trend towards a split in responsibilities: HR is designing the benefits and negotiating them with trade unions and workers’ representatives, and the financing and buying of those benefits is then handled by insurance departments or risk managers. There is a strong tendency for risk managers to become more involved in decisions on employee benefits, and we observe that companies who have succeeded in bringing HR and risk management together in this field have earned good returns on this investment.

Could you tell us a bit about the Zurich network?
In order to provide a multinational company with a pooling or captive solution, you need to have local insurance contracts issued by a licenced local partner who can also provide local expertise for the client’s subsidiary. Zurich sets up cooperation and re-insurance agreements with all these local partners, and this forms our network. Zurich’s network covers in excess of 110 countries and jurisdictions which is important, as we need to be where our clients operate. Recently we added more than 30 African countries to our network. This has attracted a lot of attention, as this region does not have a well-established insurance industry, while an increasing number of western and Asian companies now target Africa as a new, rapid developing market to do business in.

How are network partners selected?
Zurich performs extensive due diligence on insurance companies with whom we might be able to work. Our clients and we need a financially stable partner. Prospective network partners must also be well known in their market, so that employees feel comfortable being insured by this company locally.

We are very interested in regional partners who can cover several countries through their own organisation. Last year, Zurich concluded an agreement in Asia with AIA (American International Assurance), which covers 15 countries in Asia Pacific. As mentioned before, we have entered into an agreement with an African group which covers 34 countries and are in the process of setting up an  arrangement in Central America and the Caribbean, which covers 22 territories.

These regional arrangements leverage the combined expertise. It is much more efficient for involved parties to deal simply with three partners, rather than with each of the 71 countries separately.

What advice would you give to multinationals looking to set up global benefit schemes?
Multinational companies should define clear global guidelines on what they want to offer, and how they want to handle benefits. When I say guidelines, I mean a framework, because, as said, there will always be differences between local markets.

Central steering on how to design, provide and purchase these benefits can provide significant savings potential and increase the governance over the employee benefit plans worldwide. This can also reduce potential unpleasant surprises, for instance by bringing to light the fact that an insurance policy will pay out reduced sums in case several people become injured, or are even killed in the same incident or event.

For larger companies, the captive is an ideal tool for employee benefits. However, it requires a clear strategy and a risk management philosophy. The larger the company, the more it needs insurance capacity on the property and casualty side, and the less it needs capacity on the employee benefits side, because it can absorb a lot of volatility and risk internally. Still, multinationals will often need a pooling network to provide them with the infrastructure to manage and coordinate such programmes across the globe.

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