Transcript Casualty Actuarial Society Annual Meeting Confidential Collateral

Casualty Actuarial Society Annual
Meeting
Collateral
Replacement
Program for
Self-Insurers
November 11, 2002
Confidential
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OVERVIEW
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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
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SELF-INSURED FUNDS
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Self-Insured Funds
Claims Flow
COLLATERAL
Surety, L/C, Cash
Claims
Company
A
Non-payment
Claims
Claims
Company
B
Non-payment
Claims
Pool
Claims
Company
C
Non-payment
Claims
Claims
Company
D
Non-payment
Claims
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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?
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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)
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ALTERNATIVE COLLATERAL STRUCTURE
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Alternative Collateral Structure
Claim Flows
COLLATERAL
Financial Guarantee
Claims
Company
A
Non-payment
Claims
Claims
Company
Non-payment
B
Claims
Retention
Aa3
Aaa
Super Senior
Claims
Company
Non-payment
C
Claims
Claims
Company
Non-payment
D
Claims
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Alternative Collateral Structure

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
Benefits
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CONCLUSION
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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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