Lloyd’s is the UK-based, global insurance and reinsurance market, accepting business from more than 200 countries and territories worldwide. The Lloyd’s Pension Scheme (LPS) has an active membership of around 700. Historically, this Scheme had self-insured both its lump sum death-in-service benefits and its dependants’ death-in-service pensions (DDISPs). An insured ‘stop-loss’ policy had previously been put in place to cover benefits if they exceeded a stated maximum in any one year, but this policy had lapsed and proven to be impossible to replace, principally because of the insurance market’s reaction to the terrorist attacks in the USA on 11 September 2001. Towers Watson was therefore asked by Lloyd’s to undertake a review of its group life assurance benefits (lump sums and DDISPs).
The review had three main objectives:
- To identify whether self-insurance continued to be the most appropriate financing vehicle.
- To consider the risk of a ‘one location’ catastrophe and its impact on the LPS.
- To identify ways to mitigate the catastrophe risk as much as possible.
First, Towers Watson obtained the historical membership and claims data for the LPS and identified the current and expected reserving levels for death-in-service claims within the Scheme. A Towers Watson modeller was then applied, which simulated the potential total claims value in one scheme year and then repeated this for 1,000 instances. This process allowed the death claims volatility within the Scheme to be mapped so that the likelihood of total claims exceeding a given value in any one year could be identified. A separate modeller was then applied to these outputs to estimate the likely premiums if the scheme benefits were fully insured.
In addition to the modelling exercise, Towers Watson:
- Obtained quotations for the full insurance of the lump sum benefits and, separately, for the DDISP benefits.
- Obtained ‘catastrophe-only’ insurance quotation to compare against the catastrophe limits offered by the mainstream group life assurance providers.
- Assessed the likely impact of a single catastrophic event occurring at the Lloyd’s building in the City of London.
The ‘catastrophe-only’ insurance was immediately identified as uncompetitive, particularly as the premiums for this cover would be payable in addition to any self-insured reserve. However, the full insurance costs were highly competitive in comparison with both the self-insurance reserving costs and the modelled costs.
The life assurance benefits were ultimately fully insured with two separate providers; one for the lump sum benefits and another for the DDISPs. As a result of this approach, the following outcomes were achieved:
- The client gained a far more accurate understanding of scheme volatility and the reserving costs for self-funding.
- The client could also compare the cost of full insurance against the expected premium figures modelled by Towers Watson.
- The full insurance cost was found to be 14% cheaper than the previously calculated reserving value, saving nearly £70,000 per annum.
- By insuring the lump sums separately from the DDISPs, a combined catastrophe limit of £190 million was achieved, which was sufficient to cover most of any expected maximum loss at the Lloyd’s building in London.