Captive insurers are used by many large companies to deliver significant value for a vast range of purposes, and are now beginning to be applied to defined benefit pension buy-ins. Mercer is a first mover in the market, offering a one-stop-solution to cut through the complexity and deliver significant advantages for sponsors.
Many of the world’s largest companies have set up in-house captive insurers to reduce the expense of insuring their risks externally. Now the concept is beginning to be used for “buying in” defined-benefit (DB) pensions, with considerable benefits for companies, trustees and beneficiaries alike. As company profits come under pressure, so the appeal of DB captive insurers is growing.
The primary purpose of a conventional captive insurer is to reduce the total costs of a company’s risks. Typically, companies use them to insure a wide range of risks. For instance, they might be used to insure a company’s fleet of vehicles or its buildings. As a result, there are about 7,000 captive insurers worldwide1, including around 90% of S&P 500 companies.
When it comes to DB pensions, captive insurance does not have to be complex. Mercer has established an off-the-shelf captive insurance solution, which allows companies to access the substantial value a captive can generate without the capital and administrative hurdles typically required for an individual company/captive setup.
What type of companies should consider a captive insurance solution for their DB pension schemes?
Broadly speaking, companies/schemes with the following characteristics:
It may be particularly beneficial where Trustees are looking to secure benefits with an insurer, but the company is resistant due to either unfavourable accounting treatment or because they don’t want to pass significant profit to a third party insurer under a conventional buy-in.
Economic headwinds are putting companies under pressure to protect their profitability and generate value. At the same time, pension scheme funding levels are increasing to historically high levels and trapping ever greater amounts of value. There’s a greater logic than ever for deploying captive insurance to allow companies to access this value, which fundamentally they funded in the first place.
Just as many companies face fresh headwinds, so there’s a need for new ideas. Captive insurance is a tried and tested concept that can be applied to pensions, with the following advantages:
For the company
These advantages need to be considered against the risk that remains with the Company from using a captive (by contrast, a traditional insurance buy-in removes the risk). However, these are the same risks that the Company has managed for many years, and the reward for continuing to do so is high, as outlined above.
Mercer is a first mover in the establishment of captive insurers for DB pension buy-ins. At the time of writing, four DB pension captive insurers have been established in the UK and we have been involved in all of them, taking a range of roles. Mercer has leveraged this experience to create an innovative implemented solution to bring to the wider market.
There are three reasons for selecting Mercer to establish your implemented DB pension captive insurer:
For more information on our captive insurance solution or to find out if this is suitable for you scheme please contact us.
1 Captive International, AM Best. https://www.captiveinternational.com/contributed-article/captives-by-numbers
John Gething, Mercer Principal and Actuary
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