Artex & PwC launch Iccaria, Guernsey based longevity swap facility

Artex Risk Solutions, the alternative risk and captives arm of brokerage Arthur J Gallagher, has joined forces with PwC to launch Iccaria, a Guernsey domiciled facility which can act as an intermediary insurer for pensions looking to transact longevity swaps.

Following the trend of disintermediation in order to reduce costs of longevity risk transfer transactions, Artex and PwC are the latest to launch a facility which is designed to help pension funds to reduce the frictional costs of longevity swaps.

The pair have established Iccaria Insurance ICC Limited, a Guernsey domiciled incorporated cell company, which will offer pension funds cells that can be used to act as an insurer for the purpose of longevity swap transactions.

By using a cell structure as the intermediary insurer, it allows a pension scheme to more directly access the necessary sources of reinsurance capacity which are ultimately required with lower costs. Typically, a longevity swap would see a pension scheme enter into a swap with an insurer, which then in turn transfer the longevity risk to reinsurers. With Iccaria, and similar structures, this can be achieved more directly and much more cheaply.

Pension schemes could establish their own insurance vehicle, as BT did for its record longevity transaction, but this leaves them to manage the reinsurer credit risk alone. Facilities such as Iccaria mean that this can perhaps be better managed, with access to experts to assist.

PwC said that Iccaria will provide pension funds with direct access to reinsurers, further opening up the longevity market to pensions schemes with liabilities as low as £250 million. Iccaria will give pension schemes a choice over who operates the contract, potentially leading to lower costs overall for the transaction.

Paul Kitson, a partner in PwC’s pensions team, commented; “Since the first pension scheme longevity swap in 2009 there have only been around four to five deals each year. Innovative new captive vehicles, such as Iccaria, mean that deal volumes could treble this year. Pension schemes that previously viewed longevity swaps as too expensive, or who thought they were too small to access this market, are likely to re-think their options given the changes in the market.

“PwC’s pensions and captive experience, together with Artex’s new captive vehicle, allows our pensions clients to transfer longevity risk at a much lower cost while retaining the flexibility over how the longevity hedge is administered.

“Now is a great time for any company looking to remove risk from their pension scheme due to the new longevity swap structures and attractive reinsurer pricing. Our experience on deals in 2014 shows that the cost of hedging longevity can often be lower than the funding reserves calculated by pension schemes. In addition to this, the door to the longevity swap market is now fully open for smaller pension schemes and in 2015 we expect a number of sub £100m transactions to take place for the first time.”

PwC said that it believes that the longevity swap market could treble as a result of facilities such as Iccaria, helping to reduce friction, costs and make longevity risk transfer simpler.

Paul Eaton of Artex Risk Solutions commented; “This is an exciting time for Artex and the captive industry as we move into an era where we are able to help pension fund clients hedge their longevity risk on a cost effective basis. For many years the captive industry has been providing clients with alternative risk transfer facilities, and this is another example of innovation being used to develop a bespoke solution to meet market demand.”

Artex worked on the record £16 billion BT Pension Scheme longevity swap, which saw the telecoms company become the first pension to establish its own cell company to use as an insurer. Since then Towers Watson has also launched a facility to allow pension schemes to more readily access reinsurance capacity as well.

“Working as the insurance manager on the industry’s first pension longevity transaction to use a captive, whilst helping BT Pension Scheme establish its ICC in 2014, Artex is ideally positioned to support Iccaria. We are aware of the substantial market interest in this area and we are delighted to be working alongside PwC to offer a market-leading facility,” continued Eaton.

As more of these facilities emerge it will become cheaper and easier for pension funds to access the required reinsurance capacity to help them transact longevity swaps quickly and more cheaply. As a result the market will grow, with many smaller pension schemes already aware of the longevity swap process but historically having found the cost too much to bear.

View our directory of major longevity swap, longevity reinsurance and risk transfer transactions.

Also read: UK longevity swaps hit £50B, another £20B expected in 2015: Aon Hewitt.