Collateralization: A Glossary

Collateralization: A Glossary

* Loss-Sensitive Insurance Plan: Usually used for workers' compensation coverage, where the company shares the burden of its loss expenses with the insurer via a higher deductible and lower premiums.

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* Guaranteed-Cost Insurance Plan: Companies pay fixed premiums for the policy period, regardless of the losses that occur. The company transfers the expenses associated with its losses to the insurance company, so the premium reflects those higher costs.

* Collateral: When used for an insurance loss-sensitive insurance policy, it's the insurer's security to cover anticipated workers' compensation claims. Calculated by the insurer, it takes the form of letters of credit, cash or trusts.

* Overcollateralized: A policy is considered overcollateralized when a company's collateral, which was originally calculated and set up to cover its anticipated workers' compensation claims, exceeds the value of the company's claims in any given policy year, or when claims are totaled over a given period.

* Higher-Deductible/Lower-Premium Plans: Another way of describing loss-sensitive plans.

* Loss Pick: The forecasted loss for a company that the underwriter and its actuaries compute based upon loss rates and the carrier's anticipated future exposure. The loss pick sets the stage for future collateral requirements.

* Loss Development Factor: During renewals, the carrier will apply the LDF, which corrects errors in estimating the loss reserves and projects the expected costs for a group of claims. The correction is based upon actuarial studies of incurred losses, paid losses and loss reserves.

October 1, 2006

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