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Understanding Collateral Requirements in Relation to Self-Insurance

Understanding Collateral Requirements in Relation to Self-Insurance. 2006 Casualty Loss Reserve Seminar September 12, 2006. Introduction. Why collateral is required How collateral is determined Collateral stacking – what and why

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Understanding Collateral Requirements in Relation to Self-Insurance

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  1. Understanding Collateral Requirements in Relation to Self-Insurance 2006 Casualty Loss Reserve Seminar September 12, 2006

  2. Introduction • Why collateral is required • How collateral is determined • Collateral stacking – what and why • How insurance program structure affects operations and collateral • Types of collateral • Other Key considerations before selecting the insurance program structure and collateral • Questions

  3. Why Collateral? • Credit Risk for Insurer • Statutory Requirements • Rating Agency Considerations

  4. Who Best to Take Credit Risk? • Casualty Insurer? • Bank?

  5. How Collateral Requirement Determined? For Financial Reporting Year (Balance Sheet) • Estimate of Ultimate Loss – Paid to Date What Impacts This Calculation? • Actual Loss Results to Date • Loss Development Methodology • Development Factors Used

  6. How Collateral Requirement Determined? For Budget Year (Fiscal Plan) • Loss Forecast What Impacts This Calculation? • Historical Loss Experience • Loss Forecast Methodology • Development Factors Used

  7. Collateral Stacking • What is collateral “stacking”? - Collateral stacking is the accumulation of required collateral across multiple effective periods. • Why is collateral “stacked”?- Paid loss emergence patterns- Accrued loss emergence and “IBNR” losses

  8. Collateral Stacking (cont.) • Example 1 – No growth and no inflation scenario • Example 2 – No growth and 4% inflation scenario • Example 3 – 3% growth and 4% inflation scenario

  9. Collateral Stacking

  10. Collateral Stacking

  11. Collateral Stacking

  12. Collateral Stacking

  13. Collateral Stacking

  14. Collateral Stacking

  15. Collateral Stacking

  16. Biggest Impact on Collateral? Actual Loss Results

  17. Collateral Stacking

  18. Insurance Program Structures Impact • Common Insurance Program Structures- Guaranteed cost- Deductible- Self-insured retention- Retrospectively rated contracts- Captive insurance company

  19. Insurance Program Structures Impact (cont.) • Balance Sheet and Income Statement Impact • Working Capital Impact • Credit Capacity Impact • Compliance considerations

  20. Insurance Program Structures Impact (cont.)

  21. Types of Collateral • Letter of Credit • Cash • Surety Bond • Trust Account • Promissory Note

  22. Insurance Program Collateral Impact Deductible

  23. Considerations • Cash Position • Effective Tax Rate • Ability to Retain Risk • Capacity and Cost of Collateral • Financial Strength

  24. Questions? Tom Fuller Liberty Mutual Sr. Risk Management Consultant 314-843-0600 x214 thomas.fuller@libertymutual.com Marn Rivelle KPMG LLP Senior Manager, Actuarial Services 213-533-3340 marnrivelle@kpmg.com

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