Product Update

Reducing Collateral Uncertainty Discussed in Risk Financing


This release of Risk Financing updates the discussion on reducing uncertainty in collateral requirements for self-funded programs.

Although financial security requirements may not have as much impact on the total costs of a program as the insurance premium, retained losses, claims handling, and coverage wording, collateral issues nevertheless can be significant. Self-insurance, large deductibles, and other types of loss-sensitive plans can be faced with extensive collateral requirements, sometimes in the tens of millions of dollars. A lack of information regarding collateral establishment and adjustment creates uncertainties and often leads to disputes between insureds and insurers. It can also result in significant additional costs. Negotiations with insurers up front over how collateral levels are established and adjusted over time can help avoid disputes and unnecessary expenses.

The discussion titled "Reducing Collateral Uncertainty" has been updated by Michelle Bradley and Lloyd Kelley. Ms. Bradley, ACAS, MAAA, ARM, is a consulting actuary with SIGMA Actuarial Consulting Group in Brentwood, Tennessee. Mr. Kelley is a retired director of strategic consulting for SIGMA Actuarial Consulting. Initially authored in 2007, the discussion explains a proactive approach to collateral negotiations supported by quantitative analysis. It provides examples and offers suggestions for negotiating collateral levels throughout the entire period that an insured is required to maintain security for a program.