We use disk encryption to protect against a specific attack that had occurred in the past: the attacker hacks the hosting provider's admin panel and uses it to reboot our server into a rescue system, in which he has access the raw disk.
Interesting, what hosting provider/system are you talking about here?
It seems to me having admin panel access is an even higher level privilege than having root on the box itself, for any VPS host environment I've personally used before. Linode for instance lets you open up a root shell to your running box, which doesn't even use SSH. I'm surprised it isn't total game-over if your admin panel access is compromised.
The provider that got hacked was Linode. That was a real bummer: we secured the server to the teeth and then we got hacked through a channel that we had no control over. :(
But there are many providers out there where through the admin panel you can gain access to a system. Many providers provide access to the server's terminal. Even if you can't login, you can reboot the server, and at the boot loader stage you can boot the OS in rescue mode, during which you can mount the hard disk.
