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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

Understanding Collateral Requirements in Relation to Self-Insurance

2006 Casualty Loss Reserve Seminar

September 12, 2006

introduction
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
why collateral
Why Collateral?
  • Credit Risk for Insurer
  • Statutory Requirements
  • Rating Agency Considerations
who best to take credit risk
Who Best to Take Credit Risk?
  • Casualty Insurer?
  • Bank?
how collateral requirement determined
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
how collateral requirement determined6
How Collateral Requirement Determined?

For Budget Year (Fiscal Plan)

  • Loss Forecast

What Impacts This Calculation?

  • Historical Loss Experience
  • Loss Forecast Methodology
  • Development Factors Used
collateral stacking
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
collateral stacking cont
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
insurance program structures impact
Insurance Program Structures Impact
  • Common Insurance Program Structures- Guaranteed cost- Deductible- Self-insured retention- Retrospectively rated contracts- Captive insurance company
insurance program structures impact cont
Insurance Program Structures Impact (cont.)
  • Balance Sheet and Income Statement Impact
  • Working Capital Impact
  • Credit Capacity Impact
  • Compliance considerations
types of collateral
Types of Collateral
  • Letter of Credit
  • Cash
  • Surety Bond
  • Trust Account
  • Promissory Note
considerations
Considerations
  • Cash Position
  • Effective Tax Rate
  • Ability to Retain Risk
  • Capacity and Cost of Collateral
  • Financial Strength
questions
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