June 30, 2023
Employers have access to a variety of financing mechanisms to help control costs and improve governance, which helps ensure a level of consistency in managing benefits across the globe. There is no one size fits all; each organization needs to find the right mechanism based on its size, structure and appetite for risk.
The following section discusses the various types of financing mechanisms, the current landscape and how to align financing mechanisms with a company’s global consistency strategy.
Types of Financing Mechanisms
There are six main financing mechanisms that global employers use:
- Local Fully Insured Plan: Employer works with a local insurer to provide benefits, with the local insurer owning the risk.
- Regional Plan: Pools a number of smaller markets under one regional vendor who can provide local insurance. Usually, the plan is a single regional policy rather than multiple local policies.
- Multinational Pooling: Combines the insured employee benefit plans of different countries with one or more multinational pooling networks. The overall claims performance is taken into account, and an overall surplus or loss can then be determined. Employers receive a share of any surplus.1
- Global Underwriting: Combines risk benefits (life insurance, disability, accidental death and dismemberment, travel accident) under one global insurance vendor. Local insurance policies are issued by the vendor.2
- Captive: Employer-owned insurance company that bears the financial risk and works with global fronting carriers to provide insurance benefits around the world.3-6
- Local Self-Insured Plan: Employer works with a local insurer or a third-party administrator (TPA) to administer benefits, with the employer owning the risk.
Table 4-1 simplifies the key components of financing mechanisms and includes a few caveats to keep in mind. Captives do not give complete autonomy to the employer, and financial efficiencies vary across mechanisms, from no ability to spread costs to improved cash flow.3 It is best to work with a broker and/or captive manager to fully understand specifics of the items highlighted in the chart.
Global Financing Mechanisms Landscape
Global financing mechanisms are implemented to find savings and gain more transparency in reporting for governance. These mechanisms can also be used to consolidate risk benefits (i.e., life insurance, disability, accidental death and dismemberment, travel accident) under one vendor. More recently, there has been an uptick in companies using these mechanisms to help deliver a more consistent approach across their global benefits. Several global employers leverage the savings from these mechanisms to help fund new and innovative benefits (e.g., coverage for exclusions, fertility).
While global financing mechanisms allow for greater governance control, transparency and vendor consolidation to make managing global benefits easier, it’s important to understand some potential challenges. One of the key challenges is the effort required to transition numerous local insurance arrangements to one or two global networks and the inability of those networks to provide a viable solution in all markets.3,5 There can also be delays in the reporting process. For example, there is often a substantial delay in receiving information on claims experience, and the reporting capabilities of most insurers remains a work in progress. With local and regional plans, reporting may not be available at all, depending on the size of a given population or the location. On the positive side, however, many companies use dashboards effectively to display the available data, enabling transparency and proper alignment with the company’s strategy.
The next step is to educate the broker and consultant on the company’s strategic vision. Then they can leverage the approach in support of renewals. During the renewal cycle, your broker or consultant should provide guidance on how to meet the needs of your strategy by including what is possible for a market based on insurer openness, employee population size and the regulatory landscape. Given the prevalence of global financing mechanisms, some of the larger global brokers have specialized teams that will provide support with this task.
Aligning with Global Consistency Strategy
With some creativity and a strategic framework, financing mechanisms can be used to help implement a global consistency strategy. As companies move toward implementation, there is a growing interest in captives. A substantial number of multinationals use captives for property and casualty insurance services. Companies are expanding them to include global risk benefits (life and disability), as well as medical benefits.
Captives can be used to reduce costs as well as serve as an incubator for new insurance coverage currently not available in the market. In 2021, there was an increase in companies starting captives or expanding the reach of their existing captives; Mercer Marsh Benefits estimates that up to 150 employers now use a captive to finance employee benefit risks.6
Employers are actively seeking support from captive consultancy firms in the development of their captive programs, which provide the following services:
- Setting up the captive design so that it is in line with the corporate strategy;
- Facilitating discussion with corporate finance and HR functions;
- Facilitating discussion with local business units on corporate captive strategy and implementation;
- Determining the adequate pricing/underwriting methodology for all lines of business reinsured to the captive;
- Managing relationships with the various employee benefit networks;
- Providing claims management services and techniques;
- Maintaining a captive database for claims analytics/performance reports to enable wellness initiatives; and
- Implementing global health care plans for critical medical conditions and ensuring equal coverage for all employees where local solutions are not available.4
When it comes to implementation of a global consistency strategy, employers have had greater success using a global captive or locally self-insured plan to implement their core benefits, as they have greater control over benefit design, largely because the company assumes the risk. Locally self-insured plans may not be compliant or tax efficient in some countries and may present a challenge for smaller subsidiaries that are unable to accept volatility from higher-than-expected claims. In these instances, a captive may be a more viable option, as it allows for additional cost savings from bundling policies across the globe. Other financing mechanisms are feasible but will require gaining the insurer’s buy-in and may risk confidence in offering benefits and services outside the market median. A global consistency strategy may also result in extra costs, which will require alignment with the local team and insurer (local, regional or global) to make the transition.
Vendor Consolidation Considerations
An employer, particularly a decentralized one, may combine one country’s employee populations from different business units that have access to the same pool of vendors to increase its purchasing power during the bidding process, even if these units have potentially different benefit designs. Collaboration between local HR teams and the global team will allow the final design to meet global consistency strategy and local business unit needs.
Vendor consolidation may include brokers, insurance carriers, actuaries and administrators. While consolidating to one plan or financing mechanism may not be feasible, employers may be able to procure one administrator for all the plans, reducing the overall costs. Challenges employers face with vendor consolidation include work councils, consent requirements, regulatory limits and financial restrictions. For example, it might be more expensive to consolidate plans than to leave them alone. When contemplating changes, employers should consider having their consultants/brokers perform a feasibility study to ensure that benefit consolidation will be cost effective and compliant with local regulations.
The path to global consistency is a multiyear marathon, and financing mechanisms are just one part of that journey.
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- 1 | Brown B. Multinational pooling. Smith and Williamson. October 1, 2019. https://smithandwilliamson.com/en/insights/multinational-pooling/. Accessed October 5, 2021.
- 2 | Loeschner M. Pandemic, employee benefits and the appeal of a global underwriting approach. Commercial Risk Manager. December 4, 2020. https://www.commercialriskonline.com/pandemic-employee-benefits-and-the-appeal-of-global-underwriting-approach/. Accessed October 1, 2021.
- 3 | Mercer. Captive financing for employee benefits. September 26, 2019. https://www.mercer.com/our-thinking/health/captive-financing-for-employee-benefits.html. Accessed January 23, 2022.
- 4 | Aon. Employee benefits & captives – A 2020 perspective. October 2020. https://www.aon.com/getmedia/a312b2f0-d63e-4a77-8de2-b5fb611356bb/Aon-Employee-Benefits-Captives-A-2020-Perspective.aspx. Accessed January 18, 2022.
- 5 | Mercer. Captive financing - delivering value for HR and Finance. April 15, 2021. https://event.webcasts.com/starthere.jsp?ei=1440442&tp_key=ba68303d2e. Accessed October 1, 2021.
- 6 | Marsh. The 2021 captive landscape report: Captive formations almost double. 2021. https://www.marsh.com/uk/services/captive-insurance/insights/captive-landscape-report-2021.html. Accessed January 23, 2022.
IntroCreating a Globally Consistent Benefits Strategy
Part 1What Is Global Consistency, and Why Is It Important?
Part 2Harnessing Long-Term Global Consistency Opportunities
Part 3Benefits to Include in a Global Consistency Strategy
Part 4Utilizing Financing Mechanisms to Implement a Global Consistency Strategy
Part 5Prioritizing and Advancing a Globally Consistent Vision