Captive insurance companies are providing pension funds with a
valuable avenue to the reinsurance market for transferring
longevity risk, a newly-published white paper has reported.
'Longevity risk market comes of age', the Guernsey
Finance white paper, written by insurance journalist Helen Yates,
examined how longevity risk - the risk that people live longer into
their retirement - has become a growing burden, particularly for
closed defined benefit schemes or final salary schemes.
Finding solutions to pension longevity risk has become an area
of high growth for Guernsey's financial services sector ever
since the British Telecom Pension Scheme (BTPS) entered into a
£16 billion transaction to transfer a quarter of its
longevity risk to Prudential Insurance Company of America in July
2014. In order to transfer the risk to Prudential, BT established
its own captive insurer, a Guernsey-based incorporated cell company
(ICC), allowing it to access the reinsurance market directly
without paying a bank or insurer to act as an intermediary. The
deal was significant, both in terms of its size and its innovative
use of an ICC structure.
In the white paper, Paul Eaton, New Business Director at Artex
Risk Solutions, explains that longevity has been hedged by
transferring the risk for many years, but the use of captive
insurers is a recent phenomenon.
"Historically, commercial insurance companies or banks
would be the intermediaries and they would access the reinsurance
market to find capacity. What's happened over time is that the
loading intermediaries applied to the transaction have led some
schemes to look for a more cost effective way of reaching the
reinsurance capacity, and this is where establishing your own
insurance company comes into play," said Mr Eaton.
The ICC has subsequently become the structure of choice. Each
ICC has a core which is owned by the sponsor of the ICC and
surrounding the core are a potentially unlimited number of cells,
each of which can be set up for separate captive-type business and
owned, or licensed, by other parties. Mr Eaton said the preference
for ICCs had been instigated by reinsurers requiring absolute
certainty that there is no contamination risk between cells.
"Pension schemes are also aware they may require additional
longevity transactions in a number of years' time, as their
portfolio matures, so it helps to have a vehicle that is already in
place to which you can add further cells," he said.
The benefit of going down the captive, or ICC, route, rather
than using an insurer or bank to access the reinsurance market, is
that it is easier to do business with just one reinsurance
counterparty, explained Ian Aley, Senior Consultant at Towers
"If you are a commercial organisation with multiple product
lines that expects to write more business in the future, you
probably want to spread your credit risk limits thinly across a
number of reinsurers," said Mr Aley.
"But if you're a pension scheme hedging your longevity
risk to a reinsurer, you're very comfortable to take an
acceptable level of credit risk with any one reinsurer, and the
same applies in the other direction. One of the advantages of the
captive is you can access the most efficient reinsurance price
without having to take an average of three to six - which bumps the
The white paper, 'Longevity risk market comes of age',
can be viewed
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