Captive owners face tough talks with fronts over collateral

Captive owners should ensure they provide accurate data and are ready to compromise on collateral to maximise their rate negotiations with fronting insurers, according to experts. While insurers often impose steep collateral requirements when captives are formed, they usually relax the conditions as the captives build capital. But all captive owners using fronts should be prepared to demonstrate the strength of the resources behind the vehicles, including reinsurance, they said. The experts were speaking last week during a panel session at the Captive Insurance Companies Association 2024 International Conference in Scottsdale, Arizona, which attracted 659 attendees from 44 states and 43 offshore and international domiciles. It’s a partnership between the captive owner and fronting insurer, said Courtney Claflin, head of insurance at Fluid Truck, an on-demand truck rental company. With collateral negotiations, “they want more, we want less”, Claflin said. “Ultimately, at the end of the day, the front name is on the paper. We’re kind of hog-tied. We’re going to have to do close to what they want to do. That’s fair, but sometimes what they want is exorbitant,” he said. Switching fronts is an option if they want too much money, he said. Collateral is often posted through letters of credit, trusts or funds withheld arrangements. Collateral is typically the biggest sticking point in the fronting process, said Jason Tyng, lead of the US captive solutions group at HDI Global Insurance Co. “In your mind you’re going, ‘I’m putting up all this money, for what? For you to hold it,’” but “the reason is there is a risk involved for us as a fronting carrier”, he said. The key is for captive owners to negotiate the most beneficial outcome for their captive from a collateral perspective, Tyng said. “Nobody’s going to get mad if we get more than we need, but that’s part of the negotiation process,” he said. Fronting carriers are trying to protect their risk in the early years of the captive, said Glen Stapleton, national sales account executive in the specialty markets division at PMA, a unit of Old Republic General Insurance Group. Once the captive is up and running “it’s somewhat self-sustaining because it builds surplus for doing well”, he said. “We typically want to unwind as quickly as possible back to the owners, and that’s typically a four- to six-year process. I’ve seen collateral returns as early as the third year. It really just depends on the coverage line and the tail of exposures,” Stapleton said. Negotiations over collateral often become onerous when the captive is newer, but it depends on the captive’s initial capital, Tyng said. “If you’re starting with just the minimum requirements, you’re going to see a whole lot higher collateral requirement than you would if you over capitalised the captive from the beginning,” he said. The captive rating by the fronting insurer is important, said Adriana Scherzinger, head of single-parent captives and alternative risk solutions at Zurich North America, who moderated the session. “The reason why we also ask for financial statements is we rate each and every captive,” she said. Some captives also buy retrocessional reinsurance, so “the solvency of the captive is based on who is behind this captive and who is the retrocessionaire of the captive”, she said. It’s critical for fronting insurers to have the full picture on how the program is structured and who’s behind it, she said. Aggregating data, such as five-plus years of premium and loss history and exposures, in advance of presenting the company to be considered by a particular front is key, Stapleton said. “Often, we will receive loss data that might be 100 days old or more. You will get dinged heavily if information is not updated,” he said. The data should be organised in a way that fronting insurers can manipulate easily, Tyng said. “If you’re sending stuff in PDF form, it’s very difficult for us to put it in a spreadsheet or into a model. “Those things make the whole process a lot quicker because we’ve got teams of people that eat, sleep and breathe Excel,” he said. “Rate negotiation is all about great collaboration,” Scherzinger said. This article first appeared on our sister website Business Insurance. For further news from Business Insurance, please click here.

Captive owners face tough talks with fronts over collateral

Want to read this article?

Read Next

Ferma members told AI will bring risk and reward for corporate insurance buyers

Aon’s revenues up 5% as it completes $13bn NFP deal

Warmer climate spreading risk of malaria and dengue to new regions

UN launches new net-zero insurance forum to replace NZIA

Pen extends fleet capacity deal with Zurich in Republic of Ireland

Ferma members told AI will bring risk and reward for corporate insurance buyers

Aon’s revenues up 5% as it completes $13bn NFP deal

Warmer climate spreading risk of malaria and dengue to new regions

UN launches new net-zero insurance forum to replace NZIA

Pen extends fleet capacity deal with Zurich in Republic of Ireland

Want to read this article?

Read Next

Ferma members told AI will bring risk and reward for corporate insurance buyers

Aon’s revenues up 5% as it completes $13bn NFP deal

Warmer climate spreading risk of malaria and dengue to new regions

UN launches new net-zero insurance forum to replace NZIA

Pen extends fleet capacity deal with Zurich in Republic of Ireland

Related Articles