Insuring a Company’s Greatest Assets: Offshore Employee Benefits
Article On Expatriate Employee Benefits
It is not unusual today for a Canadian firm to operate a factory in India, an American airline to have its reservations processed in Ireland, or a Bahamas registered offshore company that originates in Toronto to have expatriate employees in Africa. As we all know, the world has changed into a global marketplace with a global workforce. More and more, Canadian companies are sending their employees’ abroad to search out new markets or run operations. The employees who are sent abroad are attracted by the exotic locations, a chance to travel and experience various social and business cultures, and of course the lower taxation in some countries and sometimes the higher salary. These employees travel frequently and are key assets for the business. Most companies want to offer them optimized protection while safeguarding the continuity of their business. Many Canadian and U.S. companies are also hiring third-country nationals, especially if they have skills that don’t exist in the company or country. More often than not, the offshore company will have to hire local nationals to fill various positions. Depending on the country and labour requirements, these local employees may require benefits from a local insurance company. However, local nationals can be fully or partially covered by expatriate benefit programs. Such a decision will also hinge on the reliability and quality of the local insurance firms.
Selecting an insurance company
Some Canadian companies operating offshore use a local insurance company, but this can be fraught with inconvenience and danger. In some countries, supervisory bodies or cartel arrangements strictly regulate insurance firms. Other countries have blocked currencies or significant foreign exchange regulations. It must be asked whether the employee really wants to receive his or her benefits in a shaky currency? This is not a problem if the insurance company is reimbursing health or dental expenses, but currency payments for life and disability insurance for an expatriate should be made in a stable currency, such as US dollars or UK Pounds. In addition, employees may not be in a particular country long enough to qualify for membership in the local insurance plan or there may be a citizenship requirement. Having a pooled offshore plan simplifies reporting, administration and communication because the benefit manager will have one single-source-clearing house and will not have to negotiate with several foreign insurers. Finally, companies must decide whether they wish to deal with a highly stable European or North American insurance company or a company from a less stable country.
Challenges for expatriates
Dealing with a Canadian insurance company for expatriates abroad can also present challenges. First, the Canadian firm cannot insure local or third party nationals. Second, payments can only be made in Canadian dollars. Third, Canadian plans are designed to work in Canada with the Canadian health and workers’ compensation systems, not in a foreign private scheme or country. Fourth, disability payments from Canada will only be made if the sick employee returns to Canada, which might not be wanted or possible. Finally, Canadian insurers will at least want a time limit on insuring someone who works abroad. Basically, coverage when you need it may not be there. One should also check with an accountant to ensure that being part of a Canadian employee benefit plan does not affect residency status. Compounding the preceding issues, statutory requirements imposed on benefit plans for expatriates vary from country to country and many states have no reciprocal social arrangements or do not allow the transfer of benefit entitlements abroad. Insurance schemes put in place at the various countries may vary so substantially that it is impossible to conduct product/price comparisons.
A wide range of insurance policies
All of the above point to the need to pool or consolidate international insurance polices with one offshore benefit provider that will provide solid, portable and continuous protection. This helps streamline risk management, and cut administration and communication costs. Pooled expatriate plans also harness savings potential through higher economies of scale by insuring several operations in various countries under one plan. Perhaps most importantly, expatriate plans offer portability of benefits and bring the quality and security of benefits required by employees. Quality benefits at a reasonable price for expatriates is an imperative. If an employee becomes injured and has to be evacuated or is permanently disabled, he or she will come to the employer for help. Benefit payments can be made in the local or a set currency such as US dollars.Various expatriate programs exist. Some of the plans offer a comprehensive program while others offer just traditional insurance protection, such as life insurance. Most expatriate benefit schemes offer life insurance based on a multiple of salary, such as two of three. Others offer a flat benefit amount. The amount of accidental death and dismemberment (AD&D) usually matches the life insurance. As the name implies, this insurance is paid if an employee dies in an accident or suffers a permanent loss of use or severing of a limb, loss of an eye. etc. The currency used should match that of the employee’s home nation or American dollars as a default currency. An even more important benefit often overlooked by many expatriate employers is short (STD) and long-term disability (LTD). STD usually starts after an accident or maybe 8 days after a sickness and pays for perhaps three or four months. LTD begins where the STD ends and continues until age 65 or for life. Benefits are paid either by the employee or the employer. The typical plan pays 66% of an employee’s salary. STD can be self-insured by the employer, especially if there is a short benefit period where the LTD takes over. During the 1990s, the costs for disability insurance has risen steadily, especially with the onset of AIDS and increased depression and stress claims. The rates for the life and disability benefits are based on the age, sex, occupation, income, and location of the employees. As an example, the company of an expatriate who is traveling in Africa in a very politically unstable country can expect to pay more than the company with employees in an office in Chile. The next benefit commonly offered is a health package. This coverage includes benefits such as hospital expenses, drugs, professional services, maternity expenses and physicians charges. The premiums are based on many of the same factors as the life and LTD plans, but may weigh more heavily on the operating nation. Due to the lack of a Canadian government run healthcare system, the premiums for healthcare with an offshore provider will be higher than in Canada. Medical evacuation and emergency travel coverage is also available.Dental insurance can be added to the plan to cover basic dental services such as cleaning, scaling and extractions. Crowns and bridges are usually covered at 50%, as is dependent orthodontics. This benefit is more easily self-insured.
Other employee benefit plans include the payment of eyeglasses and contact lenses. This benefit is quite inexpensive and can be self-insured. Many expatriate employers provide other benefits to their employees such as a subsidized or free room and board, and travel. This must be self-insured.
In terms of fine print, it makes sense to examine the plan, paying particular attention to the exclusions. Some lesser quality plans exclude maternity expenses and care for newborn children while others place limits on pre-existing conditions. Still other plans have pre-existing clauses that limit the benefits for conditions which were being treated 90 days prior to being insured by the medical plan. Such exclusions can be removed for an additional premium charge.Another standard exclusion clause is for war and riot. Only a few companies will remove this exclusion. An offshore client operating in an African country that is currently a war zone sought such protection. After some searching we were able to find an insurance company that could remove the war exclusion clause for an extra premium. Others don’t give it much thought and prefer to bear the risk on their own corporate shoulders. As a broker with a background in political studies, I examine the political situation in the countries my expatriate clients operate in to advise them of whether or not they should try to have the war risk clause taken out. Janes Magazine’s web site has an excellent geopolitical update list on most countries in the world that can offer some expert insight on various countries and regions around the world.
A company need not be big to obtain these insurance plans. Expatriate plans are available for as few as 3 employees who may be in different countries. If a company has over fifty employees, the plan design can be even more flexible. Also, the larger the number of employees, the more the claims experience becomes part of the renewal premium. With some plans, if the annual international net results are positive, a dividend can be paid to the head office of the multinational. If the claims results are negative, it can be written off provided stop loss protection was agreed, or carried over to a new accounting period. For most small and mid-size offshore companies, their claims experience will not affect their renewal rates. Some clients have combined the local insurance schemes with the expatriate coverage. This can be done, for example, by using the local health and dental coverage with an expatriate disability and life insurance plan. In some cases, it can integrate third-party policies.
Selecting a benefit plan
Choosing an expatriate benefit plan does not only depend on price. Another factor is the ease of administration; for example, an employer will want a plan with a 24-hour helpline for employees with queries about their membership or medical coverage. Personalized membership cards and booklets to effectively communicate the plan are also important. In addition, employees are impressed by a plan that has prompt claims settlement in any currency. Finally, it must be determined whether the expatriate insurer is financially stable. This is of obvious importance, especially for employees who become disabled and will be receiving payments for many years.
At the end of the day, the expatriate benefits are simply another way of compensating employees. For Canadian and US companies operating overseas, expatriate plans offer the best combination of cost, portability, coverage, ease of administration and security.
David G. Tompkins, B.A., of the TFG Global Insurance Solutions Ltd. is a Chartered Life Underwriter (CLU). He has worked in the insurance and financial services business since 1991 and is one of the few international insurance brokers in Canada. David is a member of the Canadian Association of Insurance & Financial Advisors and the CLU Association of Vancouver. He may be reached by telephone at (604) 913-1150.
As published by Offshore Finance Canada – reproduced & posted on web with permission.
As Published in Offshore Finance Canada Magazine – July/August 1998 Vol. 3, No. 4
By David G. Tompkins