Fall 2008 Version Fall 2008 Version Professor Dan C. Jones FINA 4355 Homework
Risk Management and Insurance: Perspectives in a Global EconomyRisk Management and Insurance: Perspectives in a Global Economy
16. Personnel Risk Management16. Personnel Risk Management
Professor Dan C. Jones
FINA 4355
Homework
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Some ObservationsSome Observations
Employee benefits consist of all forms of employer-provided compensation, exclusive of direct wages and salaries.
Expansion of a firm’s operations internationally adds to the complexity of designing and administering employee benefit plans.
Economic expansion and the substantial growth in salaries, particularly for executives and managers, have contributed to the increasing popularity of voluntary employee benefit plans in many countries.
Firms should strive to ensure consistency of treatment among employees.
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Employee Benefit Plans and Perquisites Employee Benefit Plans and Perquisites (Figure 16.1)(Figure 16.1)
Perquisites• Club membership• Company-provided car• Personal driver and servants• Company-provided or subsidized housing• Low rate or interest free loans• Tax and financial planning service
Common Types of Government-mandated Employee Benefit Plans
• Death benefits to widows/widowers and children• Disability benefits• Retirement benefits• Occupational accident and sickness benefits• Termination/severance allowances• Unemployment benefits• Family/child allowances
Common Types of Voluntary (Private)
Employee Benefit Plans
• Life insurance benefit• Sick leave and other short-term disability income benefits• Long-term disability income benefits• Basic or supplemental medical expense benefits• Basic or supplemental retirement benefits• Payments for time not worked, including vacations• Termination/severance benefits
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Rationales for Employee Benefit PlansRationales for Employee Benefit Plans
Lifetime utility maximizationDeferred wage theory
Meeting the competition
Improved employee productivity
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Rationales for Employee Benefit PlansRationales for Employee Benefit Plans
Efficiency of the group mechanismMarketing efficiencies
Administrative efficiencies
Underwriting efficiencies
External pressures
Tax advantages
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Designing Employee Benefit PlansDesigning Employee Benefit Plans
Total compensation (remuneration) approachConsists of all forms of direct (base pay, bonuses, etc.) and indirect (employee benefits and perquisites) compensation provided by the employer
Recognizes the importance of employee benefits in the total compensation and the existence of distinct tradeoffs between benefits and wages
Reflect overall firm objectives, competitive market forces, and the needs and desires of employees
The need for a total compensation approach to wage and benefit design takes on greater importance as benefit costs escalate, becoming a larger component of total compensation.
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Defined Benefit (DB) vs. Defined Contribution (DC)Defined Benefit (DB) vs. Defined Contribution (DC)
Defined benefit planThe employer determines the benefit amounts to be provided
Generally, all employees covered by the plan are provided with the same fixed or predetermined, set of benefits, irrespective of differing ages, family composition and overall needs.
Defined contribution planThe employer contribution amounts rather than the benefits are fixed
Two examples
Flexible benefit plan
Cafeteria plan Advantages and disadvantages – pages 404-405
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International Variations – PensionInternational Variations – Pension
Pensionable ageAlso known as normal pension age, normal retirement age and pension eligibility ageGradual (phased) retirement
Types of plansDB retirement plansDC retirement plansHybrid plans
Income replacement at retirementFigure 16.2
Cutbacks in government pension schemes
Refer to Chapter 9 as well!
Table 16.1 for selected countries
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International Variations – HealthcareInternational Variations – Healthcare
BenefitsBasic healthcare benefitsSupplemental healthcare benefits
Containing escalating healthcare plan costs
Managed care programsPreferred provider organization (PPO)Health maintenance organization (HMO)
Flexible benefit plans
Wellness programs
Table 16.2 for selected countries
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International Variations – Group Life InsuranceInternational Variations – Group Life Insurance
To fund employer-provided death benefits in many countries
Death benefits frequently are included in pension schemes
Employer contributions toward the cost of group life insurance often do not create any income tax liability to employees, within limits.
Insurance coverage limits generally are expressed either as a multiple of salary or a flat amount.
Table 16.3
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International Variations – DisabilityInternational Variations – Disability
Found less frequently than pension and life insurance benefits
Plans providing short-term benefits (e.g., 3~6 months) are more common than long-term benefit plans
Benefits often tied with severance benefits or to government-provided disability benefits
Table 16.4
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Special Issues Facing MNCsSpecial Issues Facing MNCs
Total compensationDiffering tax systems, local customs and cultures, and varying living costs, collectively, argue for varying levels of total compensation and, of equal or greater significance, differing packages of wages, benefits and perquisites.
Many firms move away from local-country compensation practices to designing pay structures that provide greater fairness for all employees concerned.
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Special Issues Facing MNCsSpecial Issues Facing MNCs
Multinational poolingParticipation in a global insurance arrangement to finance the costs of its worldwide benefit programs
AdvantagesTotal insurance costs are reduced through economies of scale and scope generated from the worldwide aggregation of all insured employees and all benefit plans.Favorable claims experience in some local markets can be used to offset unfavorable claims experience in other markets.The administration and management of employee benefit plans are made simpler.Excessive margins inherent in cartel and tariff-premium markets can be overcome through the international dividend calculation.An MNC may use a traditional or create its own captive.
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Definitions and Nature of the Concerned RisksDefinitions and Nature of the Concerned Risks
KidnappingAbduction and detention, usually by unlawful force and sometimes by fraud, of an individualTo secure the payment of a ransom in exchange for the promised release of the victim
Terrorism
ExtortionUse of force or intimidation to obtain money or other property from someone
DetentionTemporary custody of an individual for lawful purposes
Chapter 6 also for terrorism
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Risk ManagementRisk Management
Carefully analyzing risks and weighing them against potential rewards of a particular project
Fully informing employees of the hazards they face
Supplying the wherewithal to enhance their safety – through training, technical means such as armored cars and, in some cases, even protective details
Planning the company’s response in the event of an event
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Crisis Management PlanCrisis Management Plan
The key is to ensure an efficient response to the event.
Crisis management team comprisingThe ultimate decision-maker, such as the CEOThe coordinator, such as the risk manager or security directorThe corporate general counsel
Even the best plans are useless if managers are unaware of their existence or of their particular roles and responsibilities in the event of a crisis.
Insight 16.2 (Survival Guide)
Crisis management teams usually work in tandem with specialized security firms.
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Kidnap-Ransom and Extortion InsuranceKidnap-Ransom and Extortion Insurance
Direct payments
Consequential loss payments, for example:Rewards paid to informants
Salaries of the victim and the replacement worker
Crisis assistanceHostage/extortion negotiation professional services arranged by the insurance company
Pricing and underwritingA function of exposure and insurance limits
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Discussion Question 1Discussion Question 1
How will changing employment patterns, changing demographics and movement to a global marketplace affect employee benefit plan design in your country in the future? Has the government in your country introduced new laws related to this issue? If not, is it considering such a measure in the near future?
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Discussion Question 2Discussion Question 2
What are the primary factors that account for the cross-country differences in voluntary employer-sponsored benefit programs?
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Discussion Question 3Discussion Question 3
What unique or special issues/problems do MNCs face in the provision of employee benefits? How are MNCs addressing these issues today?
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Discussion Question 4Discussion Question 4
Why is it envisioned that employer-provided economic security will assume an increasing role in virtually all countries?
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Discussion Question 5Discussion Question 5
Should we expect greater uniformity worldwide in the types of employee benefit programs offered and the way in which they are provided? Why or why not?
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Discussion Question 6Discussion Question 6
Identify a large MNC in your home country and examine (a) the scope of employee benefits and (b) the approach (DB, DC or hybrid) it uses to offer the benefits.
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Discussion Question 7Discussion Question 7
Briefly describe the structure of (a) healthcare programs and (b) employee retirement programs in your (your friend’s) country.
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Discussion Question 8Discussion Question 8
Why do kidnap/ransom and extortion insurance policies prohibit the insured from disclosing the existence of the insurance?