A client operating a large motor fleet decided to take a high deductible on its motor third party liability programme, with an aggregate protection capping its ultimate liability. A robust fleet risk management process was in place, so the client would be able to benefit from any reductions in losses and improve bottom line performance.
The success of this approach led to the client taking a high deductible approach to their Employers’ Liability programme.
We assessed the process and found one draw back - the insurer's demand for a Letter of Credit (LOC) to cover the aggregate exposure.
Normally a Credit Insurance facility would have satisfied insurance security requirements, but the insurance market had changed and this approach was not deemed to offer sufficient security so insurers started to demand LOCs be put in place.
LOCs are irrecoverable namely they cannot be cancelled without the consent of the insurer, plus they are 'evergreen' namelythey renew automatically at expiry date. LOCs restrict liquidity, which can impact upon potential acquisitions or additional borrowing, and they cannot be used to pay claims which have to be paid out of other funds.
The decision on whether a LOC cash be reduced is entirely in the hands of the insurer and there is no prescribed mechanism for reviewing the amount of the LOC.
We tried harder...
We provided a solution to the above, which allowed the client to have high deductible programmes on Motor Third Party and EL without the need of an LOC.
By using a captive management facility in Guernsey, we were able to provide a more flexible approach to security with the Security Interest Agreement (SIA). The SIA is an agreement governed by the Security Interests (Guernsey ) Law 1993.
It is a tripartite agreement between the Insurer, the Insured and a Guernsey Custodian, in which the Custodian holds assets (Collateral) owned by the insured to the order of the Insurer. The Collateral can be held in the form of pure cash, and can be managed by an Investment Manager who also provides the Custodian required for the purpose of the SIA.
The key benefit for the client is that the Collateral does not have to be the maximum liability of the aggregate cap, but the estimated amount of ultimate paid claims for the policy year. Claims are paid out of the Collateral and is reassessed annually, based on the estimated outstanding liabilities.
SIAs have been accepted by several leading insurers, and have proven to be less costly than an LOC. An SIA helps free up the clients liquidity and give the client more control over the funding mechanism for claims.