Captive provides discrete and complementary solution

27 March 2019

Written by Dominic Wheatley

Lane, Clark and Peacock, a leading independent, owner-managed pension, investment and insurance consultancy in the UK, published their 2019 report on pension de-risking on 27 March.

The report finds that the insurance market is entering a pension scheme de-risking boom due to stalling life expectancy increases, good asset performance and attractive insurer pricing.

But, as every rose has its thorn, the report asks whether, as demand for buy-ins and buy-outs accelerates, the insurance market is approaching a tipping point where demand outstrips available capacity.

Charlie Finch, Partner at LCP, is quoted as saying: “To date insurer capacity and pricing levels have kept pace with increasing demand but, at the current rate of growth, demand looks set to outstrip capacity over the medium term putting upward pressure on pricing and squeezing less attractive schemes out of the market.”

The Guernsey Solution

Since the first ground-breaking deals in 2014, Guernsey has underlined its position as the go-to jurisdiction for longevity risk transfers by pension schemes.

The Guernsey solution describes a captive insurance company (typically a Guernsey Incorporated Cell Company) giving the trustee a direct pass-through relationship with the reinsurance market and cutting out intermediary fees.

A captive insurance company provides a solution to the problem outlined by LCP in their latest report:

First, while the insurance market may face capacity issues in the medium term the reinsurance market faces no such constraints. From a reinsurer’s perspective, a longevity risk transfer can provide a useful hedge to the mortality risk to which the reinsurer is exposed (and there is no shortage of mortality risk!).

Second, a captive-based solution can be used as a route to, not instead of, a pension buy-in or buy-out. Indeed, where insurers are required to hold a significant amount of capital against longevity risk, a scheme that has already taken steps to manage longevity risk via a swap should be recognised by an insurer.

So, whether a scheme is more or less mature, a longevity swap provides a discrete and complementary solution to buy-ins / buy-outs.

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