Captive Owners Cite Collateral Issues as Top Concern for 2010
By CYRIL TUOHY, managing editor of Risk & Insurance®
Captive insurance owners expect collateral issues to lead their list of challenges in 2010 as the nation's major financial institutions work through the current turmoil, according to the 2010 Survey on Fronting and Reinsurance released on March 9 by the Captive Insurance Companies Association (CICA).
The annual survey revealed that 27 percent of respondents cited collateral concerns as their biggest challenge in 2010, an increase of five percentage points from 2009.
After collateral issues, captive owners cited regulatory issues (16 percent); policyholder retention/growth (16 percent); and tax, fronting and expanded utilization (7 percent) as their top concerns in 2010, the survey also found.
Other issues like reinsurance, service corporate governance and Solvency II, and ease in closing a captive made up the remainder of the concerns, based on survey responses.
"There are carriers who demand that their captive clients change banks," said Michael Mead, president of M.R. Mead & Co., and a member of CICA's Survey Committee. "I'm aware of a carrier that they would not accept collateral from Citibank."
Collateral concerns didn't even show up as a top-four issue in 2008, according to the survey. As carriers increase their demands for collateral, banks are in turn asking their clients to post more collateral, according to captive industry sources.
"Every client is talking about collateral every day now, and chief financial officers are looking at letters of credit," said survey committee member Carol Frey, vice president of business development and client retention with ACE Risk Management, during a public session at CICA unveiling the survey results.
Frey suggested that insurance carriers may not be accepting collateral from certain banks because they already have enough risk aggregation from one bank. Accepting too much exposure to one bank amounts to unsound enterprise risk management practices, according to some.
"Part of their responsibility is not to be overexposed to any one financial institution on a portfolio basis," she said.
A total of 93 percent of the respondents reported that collateral was required, up from 85 percent in the previous year, the survey found.
When asked what kind of collateral was required, letters of credit were named by 76 percent of the respondents, trust accounts by 40 percent of the respondents and cash by 28 percent of the respondents, the survey also found.
"With the market down, there's a big buildup of cash in companies," said Carol Pierce, vice president of Munich Reinsurance America Inc. "They are sitting on a lot of it."
FRONTING CARRIERS AND LINES
Around 37 percent of respondents reported using Chartis/Lexington as a fronting carrier for property/casualty coverage, 18.5 percent reported using ACE, 18.5 percent reported using Zurich and 11 percent reported using Liberty Mutual. The use of Discover Re, Old Republic and Chubb were all in the single digits, the survey found.
Workers' comp is the insurance line most likely to be fronted, followed by property lines, the survey showed.
Carrie Rice, senior manager of Johnson Lambert & Co., said the reason for workers' comp lines being at the top of the list was due to the amount of regulation involved in administering workers' comp captives.
Because the market is soft, she added, the survey showed a slight drop in the number of survey respondents reporting fronting of property lines.
The results of the survey, conducted by Veris Consulting LLC, were presented at CICA's 38th Annual International Conference in Orlando, Fla. The majority of respondents represented single parent captives (53 percent), risk retention groups (18 percent), segregated cell captives (16 percent) and association captives (13 percent).
March 10, 2010
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