Global Benefit Programmes
17 Oct 2017
Leveraging on the scale of a global workforce
Jeetandra Sukha - Risk Product Business Development
July marked National Savings Month. During this month South Africans were exposed to numerous savings campaigns. Households exposed to these campaigns may for example increase savings by making small adjustments to spending habits and by purchasing cheaper goods and services. By reviewing benefit arrangements, Trustees, Compensation and Benefits Managers and HR Specialists can also play an important role to ensure employees are better positioned to save. These small adjustments add up and can result in significant savings.
One such area, which is not significant compared to one's salary but can contribute to savings, is employee benefit costs towards group risk benefits. These are employer-sponsored arrangements that provide mainly death and disability benefits. Depending on your salary structure, savings on this could result in slightly higher take home pay or higher contributions towards retirement savings. Over the long term, these higher contributions towards retirement savings can lead to significantly higher replacement ratios. Brokers ensure that these costs are kept low by conducting risk-benefit re-brokes periodically. However, another option to consider is global benefits programmes.
Global benefit programmes are solutions set up by Global benefit networks. Global benefit networks are central entities that partner with different insurers from countries around the world to implement global benefits programmes in those countries. Typically, global benefits programmes are available to multinational corporations operating in more than one country.
Global captives are one of the few types of global benefit programme solutions. A captive can be set up and managed by a global benefit network. The captive ultimately insures employee benefit policies of a multinational's worldwide operations. The multinational corporation, therefore, becomes the insurer through the captive which provides some level of self-insurance that can lead to reduced risk charges. The local insurer's role is to collect premiums still, provide policies, and pay benefits. Multinationals would thus not have to set up insurer expertise in the respective countries they ultimately insure. This creates a saving on overheads thus keeping pricing competitive.
There may also be instances where a multinational parent company is not comfortable with bearing the risk of having a captive. In this instance, a global pooling arrangement becomes another solution that can limit the downside risk associated with captives. With this type of arrangement, the premiums less claims and other charges of participating benefits plans from around the world are combined. If the premiums are greater than claims and charges, the excess is paid to the multinational corporation as a dividend. If the premiums are less than claims and charges, the deficit may be written off.
By their very nature, global benefits programmes are insurance arrangements, and they work because they leverage on large scales. For example, a local company with 2,000 employees may find it risky to self-insure. There could be claims that completely wipe out the premiums received. This could leave the company with significant out of pocket employee benefit expenses. For such companies, the risk becomes significantly spread out if the larger pool of employees is for example 80 000 at multinational level. Combining these benefit plans and insuring them through a pool or captive can provide a feasible form of self-insurance.
Another advantage of global benefit plans is coverage and underwriting. Local insurers are sometimes not able to offer certain levels of coverage for various reasons. In these cases, the global benefit plan may still offer the desired level of coverage. Free cover limits are also significantly impacted with certain global benefits programmes. In most cases, the limits are significant, removing the need for underwriting of a significant number of employees. This, in turn, has the potential to reduce administration costs.
In the South African group risk market, price has become the key determinant regarding insurer and product selection and retention. When looking at a global benefit arrangement quote, there are a few considerations. The first being whether the quote is comparable with a similar local arrangement quote. Global pooling arrangement and local arrangements will have similar or identical benefit structures for employees. However, with a pooling arrangement, there may be a potential for dividend payments. Secondly, given that some global arrangements have an element of self-insurance one must consider whether price matters. Thirdly, a global benefit arrangement must be considered in terms of a long-term sustainable context. This is because global benefit arrangements are a form of a financing mechanism so premium rates can be better aligned to benefits.
While global benefit plans can be used to control costs or provide exposure to insurance profits the benefits are not only financial. Data and information are normally passed on to the global benefit network for presentation to the parent company. Parent companies, therefore, gain valuable insights on benefit plans of their subsidiaries. This enables centralised decision making on plan alignments between various regions.
Global benefit arrangements have been around for decades. However, these solutions are not always considered when a benefit arrangement is being reviewed. In an economic environment where 'every rand counts', these arrangements are worth considering.