If your company has an insurance policy with a deductible or self-insured retention (SIR), chances are those policies are backed by some sort of collateral which acts as a guaranteed source of funds for the liabilities produced within the deductible or self-insured retention.

The two most common forms of collateral used are letters of credit (LOC) and cash.  While cash is the most straightforward option, it does require payment of the full amount up-front, thus tying up capital the company could otherwise be using for more productive purposes. Letters of credit are generally the most commonly used and accepted form of collateral since they represent an irrevocable guarantee of payment in a specified amount. Insurers will typically only accept letters of credit from banks which meet their own minimum financial requirements.

The fees involved with letters of credit will vary depending upon each organization’s specific financial circumstances; however, there are usually two or three annual charges for a letter of credit.  These charges may consist of an issuing fee, a delivery fee, and finally the letter of credit fee itself.  The largest fee is typically the letter of credit fee, which is usually a set percentage of the face value of the letter of credit.

Over time, these collateral obligations will increase if claims are not being managed as efficiently as possible by the insurers or third party administrators.  Insurance companies, more often than not, may try to secure more collateral than is actually required.  They may cite an industry specific loss development factor or an internal loss development factor, yet neither may be relevant if your company is doing better than the norm.

All of these collateral expenses and requirements can become a severe financial detriment to a company over time.  Corporate Risk Consulting, Inc. can assist in reducing your collateral requirements and collateral-related expenses by offering the following services:

   •  Complete Collateral Review – We review all existing collateral. We will determine what is driving the costs, whether all fees are competitively priced, how the collateral requirement is being developed, and what can be done internally and externally to reduce collateral amounts, fees, and negative trends.

   •  Negotiation of Collateral Reductions – We will negotiate on your behalf with the insurers to reduce collateral requirements, fees, and loss development factors once we have determined what the cost drivers are.

   •  Collateral Tracking and Monitoring – We can track and manage all of your annual collateral requirements, renewals, fees, and reduction initiatives. 

   •  Merger and Acquisition Collateral Review – We will assist in determining how much of any outstanding collateral obligations must be retained and how much, if any, can be released or discharged.