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MULTINATIONAL POOLING Optimizing the Management of Global Employee Benefits
The Prudential Insurance Company of America (Prudential) Newark, NJ
0284622-00001-00
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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.
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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.
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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
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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.
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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.
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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.
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www.prudential.com