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Collateralization Of Cash Flow Programs

Collateralization of Cash Flow Programs

Definition

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).

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