Blogs: The Collateral Problem

Gary Osborne 19/08/2010

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g my company as an unscientific basis, there is an uptick in captive activity coming. As the recent VCIA conference concluded, our business development group sat down and counted seven valid new prospects coming out of the show. On top of our existing prospects, it means we are possibly dealing with twenty serious captive candidates right now.

The downside to this is the collateral problem. It would seem that given the soft market conditions and the low interest rate environment, collateral terms should be competitive and available at relatively low cost.

Then reality sets in:

a) Carriers are demanding more, not less, collateral as they are concerned with the fragile state of the economy;

b) Carriers are, for the first time in my memory, limiting the amount of letters of credit or exposure they will take from banks. We had a program where the carrier was unable to accept Citibank or Wells Letters Of Credit (LOCs) as they were at capacity with these institutions;

c) LOC terms from banks are far more restrictive. If you want to use bonds or equities to secure the LOC, the loan to value ratios have deteriorated from say 90% to 80% on bonds and from 70% to 50% on equities;

d) The cost of LOCs has risen from 25 basis points to 50 or 75 basis points; and

e) Carriers are reluctant (and need to be pushed) to take more in the form of Reg 114 trusts.

What alternatives are there?

a) Take a close look at whether you really need fronting paper. Other than workers comp and automobile liability, there is a good chance that a captive can issue the policy directly and eliminate the fronting charge and the demand for collateral. This involves looking at contract provisions, government requirements, self-procurement rules and whether you are looking for the captive to be treated as an insurance company for tax purposes;

b) In the United States, consider using a Risk Retention Group (RRG) for liability programs. The Liability Risk Retention Act does not define a group so the consensus has fallen that it means ‘more than one’. This has resulted in what are loosely called ‘single parent’ risk retention groups, where subsidiaries of a corporation become the group. This can work for commercial automobile, general liability, pollution and other liability covers. Again, there is still the need to review contract requirements, as a RRG is not likely to be rated in its early years;

c) Fight with carriers to use Reg114 trusts as much as possible. These trusts are available for lower fees than letters of credit and the investment rules are no more restrictive than the loan to value stipulations on the collateral for letters of credit;

d) Try and address the pyramiding collateral problem in the contract. The carrier’s wording is usually that they will review the level of collateral annually. DO NOT accept this if at all possible. This basically means ‘trust us’ and long experience says you will not be happy with their review process. We have managed, with several carriers, to put some parameters on these reviews. For example, collateral will be set at the 75% confidence level for the open years. This is still a high number but it at least gives your actuaries a position to discuss with the carriers actuaries; and

e) Reinsurance products - there are several reinsurers in the marketplace willing to take on loss portfolio transfers and replace your collateral with theirs. Obviously there is a cost, but these deals can have profit commissions built in and as the level of collateral climbs this is one more option to consider.

Collateral is the number one impediment to captive formation today. The message is to be creative in trying to: (a) define it; (b) reduce it; or (c) eliminate it. The most important thing is to address it up front and not rely on the carrier treating you fairly.

Tags: Citibank, Collateral, Letters of credit, Liability Risk Retention Act, Locs, LRRA, Reg 114 trusts, Reinsurance, Risk retention groups, Wells fargo

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Im exhausted trying to do this on my own. I need other moms to talk to. Everyday is a struggle for me. I havent seen my two younger babies since dec 3rd. and have only been allowed to talk to them 1 time in jan. I don't even know if there ok.

This is my story, i fell in love with a marine. shortly after I found out we were expecting. Little did I know that this man I was having children with was a con man. He was unfaithful from the beginning but I didn't want to believe it. After our 2nd child together things really began to change he got worse when it came to other females. Began treating our daughter like a step child and focused on our son.
In Nov 2009 he got military orders to Cherry pt, NC. I was relieved. I thought for the 1st time I can emotionally get back on my feet and face the demon he was. Little did I know that once he left he was gonna completely forget about me and our children. Left me with no water months upon months and power. giving me 160 dollars a month to feed 3 children. The stresses of this finally had gotten to me. After a 6 month battle with his command with no help I thought to myself maybe my kids were better off without me, seeing I couldn't provide for them in the way they deserved. I brought my children next door and went back home and took a knife to my wrist, as I slid it across my childrens faces rushed before me, the goofy times we had I relived in a sec. I regretted what I had done. But this was the ticket that allowed him to remove the children from my care. I was admitted into a 72 psych hold but quickly released that day told I DID NOT belong there. I returned home and my kids were with my neighbor whom had contacted my husband and of course he quickly came to Ca to get them. I couldn't even tell them good bye.
Ive spoke to law enforcement, lawyers what he did was legal. The police said my house was not safe for them because I had no water or power for them, which apparently was MY fault. His command refuses to get involved told me that the state of Ca took my rights from me, and they have this form. However I never received this form. In fact I was told that I could see them and talk to them, but once they were in their fathers care it would have to go to family law. Which I don't have the money for the "retainer" and money is so tight for everyone its hard to find one who will help for free.
And as the time goes by, he isnt allowing my children to speak to their own sister, or anyone from my family. He has completely removed me from their lives. My oldest daughter talked to them April 5th and my two little ones think I don't want them and dont love them. ( which breaks my heart ) what kind of heartless monster tells an innocent child that?
So at this point, I don't know what to do. I know that this past mother's day was the 1st mothers day in 10 yrs I was utterly alone. I don't know what to do, im literally fighting the devil.... any advice would be great. Thanks for reading this....

The reason I don't have my oldest is because my 1st husband served me custody papers with the wrong date on it, and I was out of state for the holidays and couldn't afford to go back to ca for the court date so he of course won by default.

Was I not meant to be a mom??

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Stimpson50 31/12/2011 11:32pm

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