Ever increasing life expectancy means increased longevity risk
for pension schemes and their trustees. Historically, pension
scheme trustees have had few options to address this risk which is
now often the single biggest risk that trustees and the scheme
sponsors face. Following on from insurance buy-in or buy-out or
hedging solutions, more recently a market has developed for hedging
longevity risk through the global reinsurance market.
The use of Guernsey incorporated cell companies (ICCs) and
incorporated cells (ICs) has proven to be an innovative and
efficient solution for trustees wishing to access the global
reinsurance market for purposes of hedging longevity risk by
establishing their own captive insurer in Guernsey.
How it works
An ICC is incorporated in Guernsey with the consent of the
Guernsey Financial Services Commission
Following the incorporation of the ICC, an IC is incorporated.
The trustees of the pension scheme subscribe for all the cell
shares in the IC thereby establishing the captive insurer.
The IC enters into the longevity insurance agreement with the
trustees of the pension scheme and a back to back longevity
reinsurance agreement with the reinsurer. The IC's liabilities
under the insurance agreement are fully hedged by the reinsurance
The IC is a separate legal entity with limited liability for the
cell shareholders. The IC's assets and liabilities are
separated from those of the ICC and any other ICs. The IC's
liability to the trustees of the pension scheme and the reinsurer
is limited to the assets of the IC and recourse cannot be had to
the assets of the ICC or any other incorporated cell.
Collateral arrangements can be put in place in order to underpin
the risks and exposure of the trustees on the one hand and the
reinsurer on the other.
The IC is required to be licensed under the Insurance Business
(Bailiwick of Guernsey) Law, 2002 (Insurance Law)
and to comply with certain minimum capital requirements and minimum
solvency margins prescribed by the Insurance Law, subject to
modification or waiver by the Commission.
It is a standard condition of long-term insurance business
licences that the insurer's assets representing at least 90% of
policyholder liabilities is required to be held in trust in
Guernsey. However, if the liabilities are fully funded by
reinsurance, the Commission may be prepared to disapply this
The ICC/IC structure requires a Guernsey based corporate service
provider, and insurance manager, actuary and other usual
professionals. It is important to ensure that the structure is set
up and operated from Guernsey in a manner which ensures that the IC
is based offshore.
The cost of establishing and running the ICC/IC structure for a
relatively large transaction are likely to be significantly less
than the costs a pension scheme would otherwise have to pay using
an intermediary insurer. The structure allows much larger single
transactions to be put in place with single reinsurers resulting in
less complex arrangements and better pricing.
Transactions to date
In 2014, the BT Pension Scheme (BT) set up the
first ICC/IC in Guernsey to undertake a £16 billion longevity
swap between an IC set up specifically for BT. Carey Olsen acted as
Guernsey counsel to the BT trustees.
Carey Olsen has recently acted for the Merchant Navy Officers
Pension Fund's trustees in connection with setting up an IC for
the purposes of entering into a £1.5 billion longevity swap
The use of a Guernsey ICC and IC as captive insurer is an
innovative solution which can help pension schemes manage longevity
risks using a structure tailored to their specific needs.
Setting up a standalone structure like BT did would be an
attractive option to larger pension schemes.
However, smaller pension schemes also have the opportunity to
use such a structure with various providers establishing ICCs in
Guernsey where separate ICs can be acquired and established for
various scheme's trustees to undertake longevity swap
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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