The use of insurance pooling networks to finance employee benefits is a concept that is still in its infancy in Asia Pacific. However, new research conducted by Towers Watson (NASDAQ: TW), a leading global professional services company, found there may be significant savings to be gained from the use of these financing solutions — global companies that operate multinational pooling arrangements were found to generate annual average returns of 6.1% of paid premiums.
Towers Watson’s 2014 Multinational Pooling and Benefit Captives survey analysed 753 multinational pooling reports from 151 international companies containing US$2.4 billion of premiums. It found that nearly two-thirds (64%) of multinational pools returned positive dividends. The research also revealed top-performing multinational pools produced a significant proportion of the returns with over a quarter (28%) producing dividend returns in excess of 10%.
Multinational pooling combines a company’s group insurance contracts for employee benefits in different countries under one financing arrangement to create savings through economies of scale. Sources of these economies of scale include risk reduction and administrative efficiencies.
Rajesh Daswani, senior consultant at Towers Watson in Asia Pacific, said: “With operational cost reduction and synergies still very much at the top of the corporate agenda, multinational pooling is an increasingly popular way for companies to use their global spending power to achieve savings, and at the same time, spread the risk of their employee benefit plans across multiple geographies and business areas.
“This signifies an untapped opportunity for Asian multinationals, especially those in expansion mode. Leveraging an organization’s size in financing its employee benefits can reap considerable cost savings with little downside risk.”
The research also uncovered the wide discrepancy in performance between different countries, with profitability levels for Indonesia and the Czech Republic hitting 36% and 33% of premium, respectively. In Asia Pacific, Japan and Malaysia also figure in the top 10 most profitable countries globally as shown in the table below. Only six countries around the world failed to produce positive average returns from multinational pools with Hungary (-36%) producing the worst results, along with Australia (-15%), Canada (-11%), Singapore (-9%) and China (-1%).
“The country results provide powerful insights for organizations that want to actively manage their pools and determine what insured risks to allocate into the pool to maximise financial returns. This is true globally but also regionally, with three markets in Asia Pacific included in the top 10 most profitable countries. Of the six unprofitable countries in the world, three countries are in Asia Pacific,” said Daswani.
“Almost all countries produce surpluses overall, but what is very interesting is that the average life-only contract result is 23% while the average for medical is -8%. This suggests companies need to consider very carefully whether to pool stand-alone medical contracts, or absorb potential losses from medical contracts should they occur. If they choose to pool, they will need to consider a number of factors including past claims experience; current local country medical cost inflation; proposed premium levels; and the existing diversity of risks and premium within the pool,” said Daswani.
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