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Comp insurers ease collateral requirements for high-deductible policies

Posted On: Feb. 1, 2015 12:00 AM CST

Comp insurers ease collateral requirements for high-deductible policies

Workers compensation insurers are relaxing collateral requirements for high-deductible policies as credit markets improve and insurers compete for profitable accounts.

Dominic Zullo, director of risk management at Cubic Corp., said it has been “many years” since he's seen such flexibility in workers comp collateral terms for the San Diego-based defense and transportation contractor.

Major workers comp insurers more often accept surety bonds in place of letters of credit to secure portions of large comp policy deductibles, which typically are $250,000 or more, sources say. This allows employers to free up capital since sureties cost less than letters of credit.

In other instances, insurers are offering paid loss credits for claims costs that are expected to be paid by the employer in the next year or two or providing collateral buy-down options by paying a fee to post less collateral.

Though collateral requirements eased somewhat after the 2008 financial crisis, the past year has seen even more relaxed collateral terms due to competition among insurers and the strengthening credit market.

“Carriers, in an attempt to write more business when they see business that they like on a loss-sensitive basis, are trying to get more aggressive on their collateral terms in order to secure that new business,” said Daniel Aronson, managing director and primary casualty placement leader at Marsh L.L.C. in New York.

Letters of credit typically are used to post insurer-required collateral to guarantee that policyholders can repay insurers for workers comp claims.

While the cost of letters of credit can vary, they're often expensive and tie up capital and available credit for employers, said Pam Ferrandino, executive vice president and casualty practice leader at Willis North America Inc. in New York. For instance, she said a financially distressed employer might expect to pay a 10% fee to secure a $50 million letter of credit, or $5 million a year. That is in addition to claims costs an employer would need to repay.

Surety bonds often are less costly than letters of credit, Ms. Ferrandino said. In the past year, some insurers have allowed policyholders to guarantee up to 30% of their collateral with sureties, “which is a huge advantage for our clients,” she said.

“Often, the price of a surety can be as little as a third of the price of a letter of credit, thereby reducing the cost of risk by significant amounts,” she said.

Brokers say some insurers also are allowing buyers to pay a fee, or “buy down” their collateral requirements, which typically is cheaper than a letter of credit. Insurers also are offering paid loss credits for losses that would be paid by the employer in the first 12 to 24 months of workers comp policy coverage, they say.

The relaxed collateral requirements are the result of “interest rates being low and carriers needing to secure profitable premium growth,” Mr. Aronson said. “So they're going to get more aggressive for loss-sensitive accounts that they view favorably.”

Insurers such as American International Group Inc. and Zurich Insurance Group Ltd. say they've offered additional collateral options for employers in the past few years. Zurich has let buyers put money in a trust fund or a certificate of deposit as collateral since 2010.

John Dyke, Schaumburg, Illinois-based head of credit risk at Zurich North America, said in a statement to Business Insurance that Zurich considers “the use of surety bonds as a form of collateral on a case-by-case basis.”

AIG's offering , started in March 2013 under its Collateral Flex Option program, allows employers with strong credit profiles to buy down up to 50% of their collateral requirements for large-deductible workers comp policies.

“The market's actually responding to the fact that corporations in the United States are in better financial condition today than they were four or five years ago,” said Russell Johnston, New York-based president of AIG's U.S. casualty division.

About one-third of the employers that have used Collateral Flex Option were new accounts to AIG, Mr. Johnston said.

Travelers Cos. Inc. offered investments buyers can use as collateral in 2010, but declined comment on whether the program remains in effect.

Employers are noticing the change in collateral terms.

Mr. Zullo said Cubic Corp. was able to apply paid loss credits to its workers comp collateral requirements with CNA Financial Corp. during its October renewal.

Cubic has 6,000 employees, and about 90% of its workers comp claim costs fall within its deductible. The more flexible collateral terms have allowed the company to free up capital for other initiatives, Mr. Zullo said.

“We're in a growth mode, and it's extremely important for us to keep credit lines open and available for growing the business,” he said.

Sources say collateral options tend to be available for employers with high credit ratings. But brokers note that policyholders need to ask for collateral options, since some insurers don't actively market such programs.

Companies need to show insurers why their risk profile is more favorable than what an insurer might project based on the employer's industry or loss experience in recent years, Marsh's Mr. Aronson said. That could include safety programs to improve an employer's workers comp claim frequency or severity.

Employers should work with comp insurers on flexible collateral terms, rather than demanding collateral options, since that could be seen as a sign of financial challenges that haven't been disclosed or are emerging, he said.

“An insurance company that hears that either you don't want to post collateral, or you don't really have the means to post collateral, is going to be more concerned and take an even more conservative stance,” Mr. Aronson said.