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MAKING SENSE OF MULTINATIONAL BENEFITS

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A multinational benefit network is a working arrangement among insurers through which companies with employees in multiple foreign countries can obtain various benefit coverages.

The multinational benefit network provides coverage for one or more foreign sites through one master contract. The network pools the claims experience of all the employees of the participating foreign subsidiaries, and a favorable loss experience is rewarded with an "international dividend."

Benefits covered through multinational pooling arrangements often include medical, life, accidental death and dismemberment, short- and long-term disability, travel insurance and pensions.

Networks vary in structure. Some are formed by a single insurer with units in many foreign countries.

Others are formed by two large life insurance companies-usually one U.S. company and an overseas partner-that operate under a cooperative arrangement.

The third most common type of network consists of several independent foreign insurers.

Most networks' master contracts include two agreements. The first agreement is between the multinational company's local subsidiary and the local insurer that is a member of the network.

Under this contract, the local insurance company charges a premium plus a risk charge that covers losses that exceed the income from the master contract, catastrophe coverage and costs involved if the contract is canceled.

In this case, the premium usually is paid by the local unit of the parent company.

At the local level, a dividend may be paid to the subsidiary if the local insurer's income exceeds costs.

However, local insurance practices and the subsidiary's size may determine the amount of the local dividend.

The second agreement, which is between the network and the parent company's headquarters, provides for pooling experience among all local contracts. The experience of all the local units is combined to determine whether the parent corporation will receive an international dividend.

When determining an international dividend, the benefit network first tallies all paid premiums, investment income and reserves at the start of the year compared with claims, commissions, risk and expense charges, local dividends and year-end reserves. If a dividend is warranted, the parent company then decides whether to send it to corporate headquarters or share it locally.

Pooling is advantageous because it allows multinational employers to spread their risks. Through such arrangements, a company's unfavorable claims experience in one country may be offset by more favorable performance in other countries.

However, if on a worldwide basis an international pool produces a loss, the network may treat it by using one of three common procedures:

Stop-loss system. An employer's losses are fully underwritten by the network insurers in that year with no loss carried forward. The risk charge for this type of arrangement is significantly higher than the charge in other methods.

Loss carry-forward system. All losses are charged to the current account, and any negative balance is carried forward to the next experience year. The risk charge under this system is reduced to covering catastrophic losses and cancellation of a master contract with a deficit.

Loss carry-forward system with contingency fund. All losses and negative balances are treated as they would be under a standard loss carry-forward system.

To reduce the risk charge for loss carry-forward, however, a contingency fund is established and maintained with an annual allocation to offset future losses.

In years of unfavorable loss experience, the contingency fund is first drawn upon to cover losses, after which any negative balance is carried forward.

The contingency fund accrues interest and, if a client cancels a contract with the network, that client's portion of the fund is refunded, less any amount that was used. This type of fund is not being used as much as it once was because of low investment yields generated by the funds.