collateralization of cash flow programs
Under cash flow programs (e.g., retrospectively rated plans), substantial
portions of the ultimate premium for coverage are not due until the insurer
has actually paid claims. Therefore, the insurer is assuming a credit risk (in
addition to an insurance risk). This creates the need for collateralization
of such programs. Additionally, cash flow programs must be collateralized as
a result of statutory requirements (i.e., virtually all states require organizations
self-insuring their workers compensation exposures to purchase bonds securing
these obligations).