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Collateral Replacement Program for Self-Insurers November 11, 2002

Collateral Replacement Program for Self-Insurers November 11, 2002. Casualty Actuarial Society Annual Meeting.

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Collateral Replacement Program for Self-Insurers November 11, 2002

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  1. Collateral Replacement Program for Self-Insurers November 11, 2002 Casualty Actuarial Society Annual Meeting

  2. This information was prepared by MMC Enterprise Risk (“MMC ER”) for the benefit of the recipient. It is intended for the exclusive use of the recipient and not for dissemination to any other third party. Information contained herein is believed to be reliable, but MMC ER does not warrant its completeness or accuracy. Opinions or estimates constitute MMC ER’s judgment and are subject to change without notice. All statistical tables, charts, graphs or other illustrations contained herein were prepared by MMC ER unless otherwise noted. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. MMC ER may have an independent business relationship with any of the companies described herein. MMC ER is the global branding identity of MMC Enterprise Risk, Inc. and its operating subsidiaries and affiliates. Securities are offered in the U.S. through Marsh & McLennan Securities Corporation, the broker-dealer operating company of MMC Enterprise Risk.

  3. OVERVIEW

  4. Overview Collateral Replacement Program for State Regulated Self-Insurers… • replaces traditional collateral - typically surety, Letter of Credit (“L/C”), cash • utilizes portfolio theory and enables self-insurers to take advantage of scale bargaining • access to highly rated, non-traditional sources of risk transfer • more certain renewability • addresses structural issues within many existing programs

  5. SELF-INSURED FUNDS

  6. Self-Insured Funds Claims Flow COLLATERAL Surety, L/C, Cash Non-payment Claims Company A Claims Pool Claims Non-payment Company B Claims Non-payment Claims Company C Claims Non-payment Claims Claims Company D

  7. Self-Insured Funds Issues Issues with many existing programs... • inefficient collateral negotiation • premium/collateral cost “lost” to the market • lack of transparency • dependence on limited and highly volatile markets • inconsistent reserving  inequitable collateral • joint and several liability - credit subsidization?

  8. Self-Insured Funds Issues Issues with many existing programs (cont’d)... • increasing collateral costs/decreasing capacity • relatively easy for a self-insurer to “walk away” • credit risk of sureties • structural weakness may allow significant, unfunded liability to build • administrative burden • tracking several forms of collateral from multiple providers • lack of ability to create self-funding mechanism (retention)

  9. ALTERNATIVE COLLATERAL STRUCTURE

  10. Alternative Collateral Structure Claim Flows COLLATERAL Financial Guarantee Claims Claims Non-payment Company A Claims Claims Company B Non-payment Super Senior Aaa Aa3 Retention Claims Claims Company C Non-payment Claims Claims Non-payment Company D

  11. Alternative Collateral Structure Benefits • Access highly rated, non-traditional sources of risk transfer • Efficient use of premium • Cash collateralize retention • Lower individual and aggregate costs to self-insureds • Reduce need for additional assessments • Transparent pricing (based on credit rating) • Significantly reduce administrative burden

  12. CONCLUSION

  13. Conclusion Application of the alternative collateral structure can significantly improve the efficiency of the self-insured pools, as well as the quality of and access to risk capital.

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