Providing an attractive benefits package to employees is of growing importance but is both expensive and risky. Risk managers are increasingly playing an important role.
In a highly competitive global employment market, talent retention and recruitment is a growing challenge, placing greater pressure on employee benefit packages. They must be robust if they are to stand a chance of attracting and retaining talent. But providing a comprehensive global benefits package comes with many risks and a huge price tag.
To counter this, HR managers are beginning to work more closely with their risk management colleagues to find effective ways in which they can facilitate the financing of such important group benefits, as a lot of the answers can be found in the insurance market.
From captives, which can drive down the cost of a benefit package, to general insurance, which connect employer’s liability and personal accident to healthcare, rehabilitation and wellness programmes – risk and insurance managers are beginning to play a bigger role in supporting employee benefits programmes.
BT Group is a good example of this joined-up approach. The telecoms company’s HR and risk teams came together to transform its financing strategy for the delivery of its healthcare and insurable employee benefits package, globally.
Using its Isle of Man-based captive insurance company, BT switched from an insured model to a global self-insured programme and, as a result, it managed to roll in 65% of suitable business and is now looking at break-even pricing.
With a trend that sees a growing number of risk and HR teams collaborating on employee benefits programmes, Airmic spoke with three insurance providers of EB solutions – Willis Towers Watson on the main risk challenges; Zurich on overcoming the income protection gap through benefits programmes; Generali on the case for a global benefit package and lessons learnt from BT.
Airmic will be hosting a series of four bitesize webinars on the provision of employee benefits. For more information, see the bottom of the article.
What are the risks?
By Willis Towers Watson
Employee benefit programmes are purchased for three main reasons: to meet legal obligations, to meet the reward strategy of the business, and to meet contractual obligations.
Much like any corporate expenditure, employee benefit programmes come with a number of risks, and so when managing these programmes on a global basis, it is useful to consider a risk framework lens through which to view these programmes.
There are several thematic risks to the provision of employee benefit programmes:
Many of these areas overlap, but considering each in turn provides a useful structure for working through a potential programme.
Let’s consider two of these themes: financial and governance. Typical concerns that businesses face in these two areas include:
- understanding the total expenditure and the reasons for it;
- concerns about local or global governance.
A good example of an area where financial understanding is important is medical benefits. Globally, medical inflation is outpacing general inflation. With a spend per capita that can run into thousands of dollars in Western markets, accepting 5% to 10% increases without further analysis is no longer deemed acceptable. How might a business react? Greater use of captives to centralise better globalised data on the drivers for health claims is just one aspect of a greater need for risk analysis.
Governance is another key issue to draw out. As multinationals gain greater understanding of their legacy programmes, the legislative framework in which those programmes operate internationally is changing rapidly.
Many global programmes would cover small local populations in unsophisticated insurance markets through ‘international’ programmes written overseas. Many localised markets are passing legislation mandating locally-licensed carriers and scrutinising reinsurance methodologies. Multinationals are therefore looking to review programmes from an up-to-date compliance perspective to ensure their legality.
We could find many other examples. However, the key point here is that the management of employee benefit programmes is becoming subject to greater risk management scrutiny and the pace of change is extremely fast.
Closing the income protection gap through employee benefits
New challenges and circumstances have led to more multinationals wanting to provide a minimum level of employee benefits as a part of their ‘duty of care’. The concept of care is also reflected the “income protection gap”, defined as the loss of earned income due to disability or death.
A Zurich study on the income protection gap found that in the event of an unexpected adult death in the UK, one-in-five households would fall into the technical definition of poverty. As this gap widens ever larger, it is apparent that employee benefits can assist in closing it and also that governments, employers, insurers and individuals all have a part to play in redressing the issue.
Example: infographic on the Income Protection Gap
Another reality that multinationals are currently facing is an ever more complex regulatory environment, coupled with increased scrutiny by regulators, and these two factors have contributed to a stronger focus on risk management and compliance. This, in turn, has increased involvement of risk and compliance managers in many corporate decisions.
To address these emerging trends, new commercial and public policy solutions need to balance corporation’s local needs with an efficient global approach in managing employee benefits requirements. They need to take into consideration a host of factors, including a corporate’s need for central control, the involvement of risk management along with local and global benefits design management, financing optimisation (e.g. captives), a focus on insurance tax regulation and a requirement for corporate social responsibility.
Global employee benefits strategy: simpler and convenient
Several factors explain the trend to align employee benefits programmes to a company’s global business strategy. On one side, employee benefits play a key role in human resources management and, in an era of augmented accountability, they enhance a company’s public profile. On the other, rising costs and regulatory complexity make it imperative for multinationals to have a closer look at benefits performance and budgets worldwide.
Employee benefits are subject to specific constraints, such as local regulations, data availability and privacy concerns. Global fronting networks have devised solutions to enable companies to overcome these constraints and leverage their global size to achieve economies of scale and better co-ordination across countries.
International benefit plans have become increasingly common, not only for the largest global firms. What makes them advantageous and what are the options available?
Pooling arrangements bring together a company’s local programmes into a single central account. This set-up enables companies to achieve financial consolidation and reduced volatility, and to gain returns at the end of the year via profit sharing. Pooling solutions have proven effective and of great value for a wide range of organisations since the 1960s.
More proactive risk management strategies are available for companies that adopt a strong control and central co-ordination of employee benefits plans, with tailored solutions including upfront pricing optimisation and enhanced terms and conditions negotiated centrally.
Lastly, an increasing number of companies are considering funding employee benefits in captives. Employee risks (typically of low severity, geographically spread and uncorrelated to casualty risks) contribute to achieving risk diversification. Owning the risk further allows for more control on underwriting, pricing decisions and claims management. Reliable and timely information and proper monitoring framework are in this case essential to sustain planning, promote understanding of local experiences and promptly respond to emerging challenges.
Companies interested in this approach will need to evaluate economic viability, co-ordination mechanisms to ensure local subsidiaries buy-in, and local compliance requirements across countries.
Case study: BT
BT can testify to some of these benefits having moved to a captive model for its employee benefits programme.
Bringing together employee benefits and insurance also has the added value of enabling risk and HR managers to view their total cost of employment, insurable benefits and non-employee related benefits across the organisation in one dashboard. This creates opportunities for risk managers to better manage the related risks, as they would a general insurance programme.
While the solutions are clear, there are three main barriers to a risk manager’s involvement:
- Cost-driven concerns: Designing and purchasing an employee benefits programme traditionally sat within the HR department. And as cost-efficiency becomes a greater objective for businesses, HR managers are concerned that the process of reshaping a benefits programme becomes more of a cost-driven exercise.
- Changing insurance providers: With cost pressures in mind, companies may need to change their employee benefits model, for example, considering the use of a captive. With any change is the likelihood of introducing a new insurance provider and, in the worst-case scenario, the possibility of HR ending its relationship with its current provider.
- New working relationships: traditionally the HR and risk departments have operated as separate entities that are governed separately. But a new trend sees the two departments working more closely on employee benefits, and this raises concerns for risk managers too, as some may feel nervous or ill-equipped to advice on this area.
The key lesson from BT is understanding and clarifying the handover points between risk and HR managers. The design, purchasing and knowledge of market requirements remain firmly with HR, whose employee benefits framework can be supported by risk managers and their insurance expertise.
Airmic will be hosting a series of four bitesize webinars on the provision of employee benefits.
For more information, see below:
|Employee benefits: challenges and opportunities
Presented by Willis Towers Watson
|The seven core challenges to providing an employee benefits programme, including the intrinsic risk of failing to offer a competitive package.
|To register, click here
Part 2: 22 September, 15:00 to 15:45
Risk management trends in employee benefits
Presented by Zurich
|As employee benefits (EB) and the related risks gain greater focus in the corporate world, new trends and solutions are surfacing, including the provision of global insurance programmes for EB risk.
|To register, click here
Part 3: 29 September, 15:00 to 15:45
Global employee benefits programmes
Presented by Generali
|One of the key risks to providing an employee benefits package is cost pressures, but a global employee benefits programmes – comprising captives, multinational pooling and a group underwriting programme – can drive down the costs and reduce volatility.
|To register, click here
Part 4: 6 October, 15:00 to 15:45
Employee benefits: case studies from BT
Lessons learnt from BT’s director of insurance, Tracey Skinner, including an overview of an employee benefits risk and insurance model, which helped BT achieve cost efficiencies.
Register to learn more from this first-hand case study
|To register, click here