Captives can reduce risk and lower longevity costs: Towers Watson


Benefits of using a captive insurance company to hedge longevity risk include a lower cost base and the guarantee of a ‘principal-to-principal’ approach between the pension scheme and the reinsurance market, according to pensions funding expert Ian Aley.

Aley, who leads the transactions team at US professional services firm Towers Watson and specialises in advising pension funds and sponsors on insurance-based transactions for de-risking purposes, told a London audience of pension fund trustees and asset managers that the use of captives was an efficient means of dealing with the risks associated with large pension schemes.

He explained that, while cost was a key factor behind using a captive, the fact that a captive allowed pension schemes to maintain control by facilitating a ‘principal-to-principal’ approach with the removal of third parties in transactions was equally important.

“The appetite for longevity is in the reinsurance market, so you could use an insurer to take the risk and then pass it on, but they will have to apply capital to that risk, even though they are not writing the risk. If you use a captive offshore, such as Guernsey, the capital regime is different and there is a greater level of relief for reinsurance,” said Aley.

“The capital that is applied to the captive you can think of in terms of a liquidity issue rather than paying someone else capital. So you still own the captive; you still own that capital. You’re not going to be able to use it for many years, but it’s still there. So, there’s a reason of cost.

“The second reason for me is if you are transacting with a reinsurer directly through the captive, you are able to have a principal-to-principal discussion, rather than have a third party influence the documentation and the terms of the contract. Therefore, it better suits the needs of both parties."

He added that traditional insurance companies acting as an intermediary would have other product lines, potential future business and business they have written in the past to consider.

“Consequently, they are restricted in terms of the level of credit exposure they are willing to take to a reinsurer. So, in reality, if you’re doing a transaction of scale, you’re now looking at an average price rather than the optimal price,” said Aley.

The pensions expert was speaking on a panel session at Longevity – is there life in captives?, an event hosted by Guernsey Finance in conjunction with the Guernsey International Insurance Association (GIIA). Moderated by captive insurance veteran Malcolm Cutts-Watson, the panel consisted of Aley; John Dunford of the Guernsey Financial Services Commission (GFSC); Philip Jarvis of Allen & Overy, Paul Kitson of PwC and Andy McAleese of Pacific Life RE.

Towers Watson, Ian Aley, North America

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