The Life Insurers’ Brilliant DB Business Model

Making Hay

• Agree with one Government Department and its regulators that the Gold Standard is for trustees to give you in cash all the money schemes needed to meet their liabilities to members, calculated on a risk-free basis.
• Agree with another Government Department and its regulators you can invest that money at cash plus 1.5%.
• Minimise any capital back up regulators expect you to put up by offloading longevity risk to third party, often offshore, reinsurers. Funded reinsurance can even provide you with cash for your ‘capital light’ business model.
• Ensure trustees in their risk assessments believe they have to ignore the stop loss PPF safety net they have paid for and that your products are Guaranteed to provide “absolute confidence”- even if your sector scheme has no Government guarantee, no money and no track record.

Your £50 billion a year risk transfer business makes so much money you can help penguins, sponsor test cricket and keep a large entourage of professionals happy.  And you and your shareholders can expect big paydays.  But hurry.  Some major global groups have registered just how attractive your niche position is – welcome to the UK Apollo and Brookfield.

Small Clouds

• Trustees could reassess fiduciary duty and propose to exercise discretion to make extra payments to help past (and present) employees because they realise the scheme has more money than it needs. 
• Government requiring (and incentivising) schemes to consider alternatives to bulk transfers to benefit people and the economy.  FRC’s Technical Actuarial Standard 300 V2 already requires actuaries to do the work.  Sponsors will want to be cut in.
• Scrutiny of actuarial work would be transformational.  ARGA heat.  Actuarial consultants have proposed from the PRT boom.  They also have a great business model.  They set the metrics, calculate the liabilities and point out that life insurer pricing looks attractive against the numbers they provided.  They do not look back to show the impact of their past work.  Who has gained from deal using overstated life expectancy tables since 2011?
• Government and its regulators realising just how much they continue to contribute to the prosperity of life insurers and go for a windfall profits tax. The regulatory arbitrages in the business models are becoming a little too obvious.

Good thing life insurers have such brilliant trade bodies and lobbyists to see off daft ideas of running on and being transparent.  Meanwhile Pension Insurance Corporation’s £5.7 billion deal with Athora provides a neat summary of the triumph of the life insurers.