It is more cost efficient to set up a captive than use an intermediary when transferring longevity risk, according to Guernsey Finance.
That was the conclusion of a Guernsey Finance-commissioned whitepaper on longevity risk, which referenced John Coles, head of operations at British Telecom Pensions Scheme (BTPS), who, during a seminar on the subject last year, said the captive route is a way of “cutting out the middle man” when transferring risk.
Coles referred to the seminal £16 billion transaction by the BTPS, in July 2014, to transfer a quarter of its longevity risk to Prudential Insurance Company of America.
He said that, in order to transfer the risk, 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.
He hinted that the structure of ICCs could potentially be used for similar deals via separate cells in the future. He said: “The captive, once it’s up and running, is relatively inexpensive.”
According to Coles, the trend of disintermediation in longevity risk transfer transactions prompted Artex Risk Solutions to join forces with PwC to launch Iccaria ICC Limited, a Guernsey-domiciled facility, in February 2015.
Paul Eaton, new business director at Artex, commented in the Guernsey Finance whitepaper: “Longevity has been hedged by transferring the risk for many years—the recent phenomenon is using a captive insurer which becomes your own intermediary to access the reinsurance market.”
The ICC has become the structure of choice, revealed Eaton. He said that each ICC has a core that 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.
Eaton added: “The preference for ICCs has been led by the reinsurers in the transactions requiring absolute certainty there is no contamination risk between cells.”
