Global Companies That Operate Multinational Pooling Arrangements See Strong Profits

Global companies that operate multinational pooling arrangements generated annual average returns of 6.1% on the financial performance of their pooling arrangements, according to Towers Watson.

The study analyzed 753 multinational pooling reports from 151 international companies comprising $2.4 billion in premiums and found that nearly two-thirds (64%) of the multinational pools analyzed returned positive dividends.

“With operational cost reduction and synergies still very much at the top of the corporate agenda, multinational pooling is a proven approach for companies to use their global spending power to achieve savings and spread the risk of their employee benefit plans across multiple geographies and business areas,” said Gerry Winters, senior international consultant at Towers Watson.

The research revealed that the top-performing multinational pools produced a significant proportion of the returns, with over a quarter (28%) producing dividend returns in excess of 10%.

“The top-performing pools generate a big share of the profits, while at the other end of the spectrum, some companies deliberately manage their pools with a view toward reducing the up-front premiums as opposed to maximizing dividends,” said Winters.

“This suggests that proactively managed pools tend to outperform their passive counterparts in delivering improved financial performance to their sponsors, underscored by the difference in profitability that can be achieved between high- and low-performing pools.”

Similarly, there may be opportunities for those companies with consistent double-digit returns from their multinational pools to leverage significant reductions in up-front premiums in many countries.

“The pooling reports provide the information needed to push these global pooling networks to reduce the premiums they are charging locally. If you see a country that has produced surpluses of 15% or more for several years, you have a strong business case to demand those savings up front through immediate reductions in the local premiums,” says Winters.

The research also unearthed the wide discrepancy in performance between different countries, with profitability levels for Indonesia and the Czech Republic hitting 36% and 33%, respectively.

Only six countries failed to produce positive average returns to multinational pools, with Hungary (-36%) producing the worst results, along with Australia (–15%), Canada (–11%), Singapore (–9%) and China (–1%).

Almost all countries produce surpluses overall, but notably, the average life-only-contract result was 23%, while the average for medical was –8%.

“This suggests companies should consider whether to pool stand-alone medical contracts based on a number of factors. These include claim experience, current local-country medical cost inflation, proposed premium level, and the existing diversity of risks and premium within a pool, including its ability to absorb potential losses from medical contracts should they occur,” says Winters.