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The results of our collateral survey conducted in the last quarter of 2010 are now in. As you may recall, we invited insurance brokers, risk management consultants, and risk management staff of self-funded concerns to participate in this survey. The goal of the survey was to assess, on a national basis, trends in workers compensation collateral negotiations, exposures, reviews, arbitration, litigation, and other factors that SIGMA actuaries have been seeing with our own clients since the financial crisis of 2009. SIGMA completed a similar survey in 2009. The initial 2009 survey highlighted several trends in increased collateral cost and difficulty securing credit. The results from 2010 indicate that collateral difficulties continue.
Executive Summary of Results
Results of the 12-question survey, which received 157 respondents, largely confirm the trends SIGMA has observed in its consulting practice. The highlights of the survey show:
- There was a decrease in the number of respondents indicating a collateral instrument of “letter of credit” with an increase in the use of cash as a collateral instrument. SIGMA believes that this is likely attributable to the pressure placed on many companies during 2009 to secure new collateral instruments and the increased cost of collateral instruments.
- In 2010, 17.2% of the respondents indicated their carrier did not complete a collateral review during 2010. This response was not an option on the 2009 survey.
- Companies are continuing to face many issues and changes in the collateral environment. However, there appears to be a decrease in the number of issues affecting companies. In a question intended to gauge the level of change, respondents were asked to select each of five critical collateral issues their company faced during the year. In 2009 an average of 1.5 of the 5 were selected but in 2010 the number decreased to an average of 1.0 of the 5. The issue selected with the highest frequency in 2010 was “facing an increased cost of collateral instrument”. There were three significant decreases from 2009 to 2010 related to the issues faced:
- The number of respondents indicating an increase in the cost of the collateral instrument decreased from 58.6% to 33.1%. We believe this could be partially tied to a shift from letter of credit instruments to cash.
- The number of respondents indicating difficulty in securing collateral decreased from 31.0% percent to 17.2%
- The number of respondents indicating there were either (1) changes in the terms or conditions of the collateral agreement or (2) increases in the collateral amount without discussion or negotiation decreased from 24.1 % to 12.7%.
- In 2010, there was an increase in the percentage of responses indicating involvement in litigation or arbitration (from 1.9% to 6.9%) and a corresponding decrease in the percentage of responses that did not consider arbitration or litigation.
- Credit risk assessments may now be affecting collateral calculations in several ways: surcharges, increased risk margins, or reductions in paid loss credits.
|More suggestions and observations related to collateral and our survey are available in the following papers published by IRMI (International Risk Management Institute) by SIGMA authors. We have limited reprints available, so please let us know if you’re interested:|
|“2009 SIGMA Collateral Survey Results and Analysis. ” March 2010, by Michelle Bradley.“Collateral Trends, Issues, and Tactics.” Risk Financing Perspectives, March 2010, by
Michelle Bradley.“Reducing Collateral Uncertainty: A Primer for Negotiations.” Risk Financing Perspectives, 2006, by Michelle Bradley and Lloyd Kelly.
“Reducing Collateral Uncertainty.” Risk Financing, Section III.L, 2008, by Michelle Bradley and Lloyd Kelly.
For Further Information, contact Michelle Bradley, ACAS, MAAA, ARM at 866-228-8279 x 204 or mb@SIGMAactuary.com
For complete survey results, including survey details and response analysis, please register for access to our password protected portal by visiting www.SIGMAactuary.com/register.
What is a paid loss credit?
A paid loss credit is a credit given in the calculation of a collateral amount to reflect the losses that will be paid during the upcoming year. For example, consider the collateral need for an upcoming 12 month projected period where the collateral will be posted in four quarterly installments. The paid loss credit estimates the expected amount of payments made for claims during the 12 months immediately after policy inception. If loss payments emerge as expected this offset will produce a more reasonable collateral requirement at 12 months. Paid loss credits are not always included in collateral requirement calculations. The impact of excluding the paid loss credit is a more conservative collateral requirement.