Understanding the Collateral Conundrum

At the 2015 SIIA Annual Conference, Joseph Braun – Credit Risk Manager with Safety National discussed the challenges associated with collateral in self-insured and deductible programs.

The excess self-insured marketplace is currently around $1.3 billion in written premium in the United States. This is a fairly stagnant marketplace with very few new companies entering self-insurance in the last few years.

Why do states require security / collateral for self-insured employers?

• Collateral is held by the states to ensure that claims are paid in the event the self-insured employer becomes insolvent and is not longer able to pay their claims.

How do most states review and set the collateral requirement?

• There is significant variation between the states on how they calculate the collateral requirement. Some focus on incurred losses, for others there is focus on actuarial development of the claims. Most states review the collateral held annually.

What forms of collateral do most states accept?

• Letters of credit, surety bonds, cash and CDs, trust accounts. Some states allow a hybrid of these methods.

Advantages and disadvantages of different collateral forms.

• Letters of credit are easy to obtain for employers with strong financials, the downside is that it ties up some of their credit which could be used for other things.
• Surety bonds are more costly to obtain in terms of rate, but it frees up the employer’s credit to use for their business.

What is a workers’ compensation surety bond?

• This is a third party agreement between the carrier, employer, and the state. In the event the employer is unable to pay their claims the carrier agrees to fund up to the amount of the bond. The underwriter will look at the financial condition of the employer in determining both the rate of the bond and any collateral that is required. Usually the only form of collateral that a surety carrier will accept is a letter of credit. That is because the LOC is bankruptcy proof. These are most advantageous to the employer when the carrier will accept collateral of 50% or less of the bond amount.

How do you control your collateral requirement with the state?

• Understand how the state calculates the collateral requirement.
• Make sure the loss data given to the state is accurate.
• Understand development factors the state is using.
• Make sure the state understands the employers financial strength and make them aware of any changes that impact the credit quality.

What are the differences between self-insured and large deductible programs?

• For a self-insured the state has to approve the employer for self-insurance and they will determine the collateral amount. For deductibles, the carrier determines what level of deductible they will accept and what collateral is required.
• With regard to claims handling, deductible carriers are much more controlling on the claims handling process. Some carriers writing deductibles will not allow the claims administration to be unbundled to a third party administrator.
• On a self-insured program, the employer is ultimately responsible for payment of the claims. On a deductible the carrier is ultimately responsible for payment of the claims.