Note: On Monday, October 15, the Milliman Chicago casualty practice facilitated an actuarial roundtable discussion for the Chicago chapter of the Risk and Insurance Management Society (RIMS) covering four topics that have received a good bit of attention recently. Participants represented local businesses from healthcare service providers to nonprofits to international fast food corporations. Attendees were encouraged to share their experiences on each of the topics. This is the second article in our four-part series discussing each topic.

Collateral has become a significant focus of many of our self-insured corporate clients (both large deductible and truly self-insured clients). Many participants in the roundtable noted the difficulty of negotiating collateral. Since the credit crunch, capital has become scarce and the rates have increased dramatically on the most common source of collateral, letters of credit (LOCs).

Self-insureds should use an actuary to estimate the remaining unpaid claim liability to negotiate the amount of collateral. Theoretically, the amount of collateral is based on the creditworthiness of the insured and the estimated remaining payments on future claims.

In general, it is in a carrier's or state's best interest to require more collateral. In some instances, they may use conservative loss development factors when estimating the future payments to inflate the amount of collateral required.

The first place to review collateral should be on old policy years. If collateral on a given policy year ever increases, a red flag should be raised and further investigation is needed.

Alternatives to LOCs are available and may reduce the cost of collateral such as loss portfolio transfers (LPTs), surety bonds, etc. Many of the participants mentioned using a trust to reduce the collateral expense. A legal advisor familiar with collateral requirements should be retained to investigate these alternatives.