The business climate has undergone dramatic change in the last six months, increasing pressure to cut costs across the board. This is an ideal time for companies to examine whether their existing employee benefit multinational pooling arrangements are delivering the maximum savings—or whether a multinational pooling arrangement is the best option now.

If you're not familiar with them, multinational pooling and captive pooling arrangements involve grouping, or “pooling,” multiple insurance contracts around the globe to minimize risk, helping companies save money and optimize cash flow. If a surplus remains from the premium from local insurance contracts—after deducting all claims, administrative expenses, insurer risk charges and the like—it is returned to the company via an international dividend payment.

A general rule of thumb regarding multinational pooling arrangements: They can return 8 to 12 percent of premium via the international dividend and can run as high as 11 to 19 percent with a captive pooling arrangement (of which a description follows). Of course, the experience of the insurance contracts factors into the dividend results and can vary from year to year. But, companies can see significant results from concerted efforts to maximize the financial results of their multinational pools.

Given the current economic environment, companies need to be aware of what has changed relative to their multinational pools—including the financial stability of their network partner—as some insurers’ ratings will have changed.

six steps to ensure multinational pooling is in line with business strategy and risk tolerance.

1. EVALUATE CHANGES TO BUSINESS

Over the past six months, what has changed in your approach to employee benefits? Have you made acquisitions, opened or closed offices, added new lines of coverage or expanded coverage in some countries? Have you added any new benefit pools, perhaps due to forming a natural pool of contracts in one of your networks?

Examine the experience of the local insurance contracts. Have they run deficits for more than a year? If so, they may be contributing negatively to overall results, and you should consider moving them out of your pool.

Also, consider if you’ve outgrown the financial vehicle for your pool. For example, you may have started with a small number of countries and used the small group pooling arrangement of an international network. Now that your business has grown, the pool may be much larger, but the international dividend may still may be limited to a percentage of the surplus. In this example, you would need to move from a small group pool to a Loss Carry Forward basis.

2. Determine if you can assume more business risk in the next six months

Are you capable of assuming more risk in your financial pool, or have you had negative results that might cause you to want to reduce your risk? By increasing risk, you will reduce the risk charge, which is a reduction from the available surplus.

Conversely, when you reduce risk, you increase the risk charge, so it is important to find the right pooling structure for your corporate philosophy. Consider examining Full Stop Loss or Loss Carry Forward, or a Loss Carry Forward with a write-off within three or five years. There are a number of alternatives you can explore with the networks—ask them to give you quotations on several scenarios.

3. Evaluate your multinational pool using available resources

Look at the annual reports from your pooling networks for the past three years. If you have several multinational pools, would it be smart to consolidate the pools into one?

Is the pooling network still the right one for your business? Could you enhance your current financial arrangements in the pool, or have you outgrown it altogether?

4. Optimize cash flow

There are various cash-flow techniques that can better match the timing of premium payments with claim payments and optimize cash flow: advanced dividend payment, premium drag, reserve reduction, terminal retro and hold harmless agreements. These are essential in today’s environment.