MARTIN ELLIS: Captors are
required to provide collateral to their insurance carriers
on fronted programs such as worker’s compensation. The two main types of
collateral they provide are letters of credit
and reinsurance trust. Letters of credit are the most
popular collateral option. It’s a simple one page
document issued by the bank to the front for a
fixed dollar amount. It’s almost like a blank check. The front presents
it to the bank at any time to settle unpaid
claims of the captive. It is more expensive
than a reinsurance trust. However, the investments
are more flexible. So many argue that the
higher investment income is going to offset the extra cost. Reinsurance trust is the
other collateral option. It’s a three party agreement
between the captive, the front, and the bank,
up to 25 pages long. It’s governed by Regulation
114 of the New York Department Insurance Regulations. Investments are restricted
to cash, US governments, and highly rated bonds. Sometimes, the beneficiary can
further restrict investments. We’ve seen to cash only. It is cheaper than
a letter of credit. However, it’s going to earn
less investment income. And amendments are
generally more expensive since it’s a longer agreement. And finally, sometimes, we hear
that it’s hard for the captive to get excess funds
out of the trust, since it requires
beneficiary’s approval.