Multinationals Streamline Benefits via ‘Pooling’ and ‘Captives’

Companies with large multinational pooling arrangements tend to have an easier transition to a captive strategy

By Stephen Miller, CEBS Mar 6, 2015

Financing employee benefits using benefit pooling and captive arrangements is allowing multinational corporations to achieve administration efficiencies and, in many instances, cost savings, a 2015 Towers Watson study report, Multinational Pooling and Benefit Captives, shows.

Benefit pooling arrangements combine a multinational corporation’s global employee benefits portfolio into a centrally administered account. Taking the concept further, a growing number of multinationals are self-insuring by establishing their own “captive” insurance companies. This form of risk management allows multinationals more opportunities to protect themselves financially while exercising greater control over how their workers are insured worldwide.

Researchers collected and analyzed nearly 800 annual reports submitted by 163 multinational companies. The study incorporated all participating benefit plans, including life, accident, disability, medical and insured elements of some retirement plans (such as spouse or orphan benefits).

Key findings from the analysis revealed:

Multinational pooling continues to be a viable long-term cost-savings tool for companies. The multinational pools included in the study showed an average 6.1 percent return on investment over three years.

Captive arrangements offer additional savings for some companies. Captives are most effective when companies have significant experience applying risk management principles to employee benefits. Captive arrangements returned average surpluses of 5.1 percent, while the median captive return was significantly higher at 11.3 percent. (The difference between the median and mean was largely attributed to one company with significant losses.)

Returns vary based on coverage types. Life and accident insurance contracts were the most consistently profitable, with returns of 23 percent for both pooling and captive business. Stand-alone medical contracts were consistent deficit producers, however, with average returns of -8 percent in multinational pools and -2 percent in captives. “Companies should be cautious about pooling stand-alone medical contracts in most countries, proceeding only where projected claims experience and network retention levels support inclusion,” the report advised.

The right risk mechanism for multinational pooling depends on the pooling strategy and the types of coverage. Almost all multinational pools included risk mechanisms that provided varying levels of protection against losses. “Companies need to understand the available risk mechanisms and select the one that matches their tolerance for risk,” the report noted. For example, stop-loss pools can be used so that one or two bad years don’t leave companies with large deficits.

The companies that benefit the most from pooling and captives share several characteristics. “In general, they systematically strive to actively manage their arrangements, expand their use of pools and captives, ensure balance, and explore new opportunities, while ending arrangements that perform poorly,” the report stated.

From Pooling to Captives

“Captives are becoming an established part of the employee benefit landscape for multinationals,” said Gerry Winters, senior international consultant at Towers Watson, in a news release accompanying the report. “Annual costs for multinationals’ employee health and risk benefits are enormous,” he noted. “Captive arrangements can help them manage these costs while providing data and insights critical to effectively managing their employee benefit programs around the world.”

Companies experienced with large multinational pooling arrangements “tend to have an easier transition to a captive strategy,” Winters pointed out. “Captives can provide an even greater opportunity for financial savings, particularly for companies with the capacity and desire to take on additional risk in employee benefits on a global basis.”

He added, “Most large to midsize multinational companies that assess this properly find they have such capacity.”

Stephen Miller, CEBS, is an online editor/manager for SHRM.​

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