As if we didn’t already have proof and needed a pandemic to realize it, the world we live and work in is totally inter-connected. Decades ago, this interconnection or globalization of business led the different actors of the insurance value chain to organize themselves to meet multinational clients’ needs. They supported their growth cross-border, especially on commercial lines insurance.
The pandemic highlighted that, on top of ESG requirements, material non-financial factors are increasingly integral to assessing long-term business resilience in the 21st century. This will impact the way employee benefits are managed; as a result, we expect changes on the brokers and consultants’ market.
Background
Commercial lines insurances, including property and casualty, are largely covered by their parent company centrally through master policies. Only a small part of the risk needs to be insured locally to meet legal requirements (liabilities, workers compensation, car fleet…).
In contrast, at least 90% of employee benefits insurances are underwritten locally. These insurances covering employee benefits such as pension plans, life insurance or healthcare to name a few, are closely intertwined with the tax, social and cultural ecosystem of each country. They cannot be underwritten outside the country when covering local employees for compliance purposes. This requires a good knowledge of legal obligations, market practice, local players who can support the subsidiary, not to mention the number of insurance policies the parent company needs to monitor centrally.
Of course, the active management of these plans by the parent company depends on its degree of centralization and governance. Historically the Anglo-Saxon multinationals model has proven to be extremely centralized with a rather strong governance on employee benefits management in comparison to other multinationals such as those based in Europe (with the exception of Dutch multinationals rather centralized). Given the HQ country’s culture, complexity and cost of managing local employee benefits insurance centrally, non-Anglo-Saxon multinationals tended to rely on their local management to implement and manage covers with no real control or monitoring centrally. There was no real stake from the HR perspective and the only centralized information was often in the hands of Finance, limited to balance sheet exposure on defined benefit pension plans and top countries spend (ex: USA medical premiums).
Broker networks models pros and cons
It is no wonder that large Anglo-Saxon insurance brokers (MMC, Aon, WTW) structured themselves most rapidly in the late 90’s by making acquisitions abroad to create their own international network. They based their operations on a strong centralized governance model in both substance and form. Like attracts like and they grew their business from servicing US multinational clients and their subsidiaries. It conducted them to build a strong exclusive global benefits management offer, with a quasi-monopoly worldwide even if this model is still today not necessarily aligned with European clients, more decentralized and looking for more flexibility.
The switch of all local brokers imposed by these models is often an issue for clients’ local subsidiaries. The quality of the local services and the commercial relationship, even under the same strong brand, vary from one country to another. The local client may have reservations about the change with consequences of slowing down the implementation of the strategy. When the change of broker generates more frustration and complaints there is a risk of losing local management and employees on the way, which is paradoxically counterproductive compared to what the multinational wanted to achieve initially.
With such a top-down approach, this is even more important to pay attention to direct (local and central commissions: fees) and indirect costs (internal time and energy to convince local employees’ representatives, explain and communicate changes) involved with this migration, especially when the purpose of the exercise is a better control of costs.
This broker’s business model is very much oriented on larger multinationals with more than 5,000 employees worldwide, with no appetite for smaller. These smaller companies however represent the backbone of the economy for each country. They play a significant role by providing employment, generating revenue, and incubating creative minds. They cannot be ignored when they need support to grow abroad.
Until now however, these fully owned broker networks offer the most consistent and reliable approach. They have centralized dedicated teams of global benefits experts and tools to coordinate programs, thus managing the employee benefits strategy on behalf of clients that might not have in-house resources.
An alternative model ?
Is there no other alternative on the market offering a leaner model more in line with the strategy of non-Anglo Saxon multinationals? One that also answers to new resilience challenges of staying agile and flexible?
Coincidentally, independent brokers did not wait to organize themselves. As early as the 1950s, the first networks of independent insurance brokers emerged to facilitate the implementation and management of insurance programs cross-border. Initially focused on commercial lines insurance and large domestic markets, nowadays they cover all lines of insurance. Currently a dozen or so networks are present in most countries via independent broker partners with no capital ties between them (WBN, Sequoia, Trust Risk Control, Assurex, Aesis, Brokerslink, Wing Insurance…). Some of these brokers, initially fully family-owned, are moving to a new shareholder structure involving private equities participation and sometimes their own employees but maintaining full independency between partners.
As part of the process to integrate brokers in these networks, a strict selection and a comprehensive due diligence is conducted by an independent company running the network before letting in new members, making sure they are reliable key players on their local market. Terms and conditions between partners are outlined in a partnership agreement, with limited guidelines on consistency of methodologies and format when dealing with cross-border projects. These agreements are more focused on revenue sharing for new business brought in by a partner to encourage cross selling within the network. This bottom-up approach and the lack of consistency across the network is obviously a big issue for global benefits services. As such, an additional coordination layer is needed. Only a few partner brokers invested in additional coordination to compete with large Anglo-Saxon brokers.
Some of those who invested in coordination services developed a hybrid model of network, including their own subsidiaries as well as local partners where they have no opportunity or appetite to purchase a local broker, sign a joint venture or implement a structure from scratch. This is the case of large independent US brokers such as Gallagher (Gallagher Global Network Partner) and Lockton Global. We observe the same phenomenon in Europe with the French brokers Siaci (Siaci Global Partners) and more recently Verlingue (Groupe Adelaïde).They have ambitions to become European champions with a model that is supposed to bring together the best of both worlds.
The future will tell us how successful they will be in this task. In any case, they will have to rely on a team of experts dedicated to global benefits and be able to differentiate their value proposition.
This is always good news to see more offers on the market when the demand is expected to increase.
New deal
The pandemic has been a large-scale test to challenge the resilience of companies and their governance, to assess their survival in the face of immediate health, social and economic difficulties without losing vision of their objectives. In addition, climate change will impact subsidiary locations, create migration, and increase health issues. We expect to see more multinationals considering non-financial factors such as access to the second level of the Maslow pyramid: a minimum level of safety and security for all employees that could be translated to minimum core employee benefits and more prevention. We also see an increasing need to communicate more efficiently with local employees abroad and develop policies based on more flexibility at work to retain and attract employees (onboarding process…).
