Collateral requirements are a common topic in the insurance industry, as companies with large deductible or self-insured programs are required to post collateral to secure their associated liabilities.  States requiring this type of security typically have a well-defined process for determining the collateral amount.  Unfortunately, that may not be the case for carriers whose formulas and processes for collateral requirements are not clearly defined.

When moving to a loss-sensitive program, insureds are often caught off guard by the growth of collateral burden over the first several years. Understanding and anticipating how these burdens build and eventually reach a “steady state” is an important process, but at times, it can be difficult to fully understand.

To help make this process easier, SIGMA has developed a PDF resource and brochure to specifically address the potential complexities associated with collateral requirements.  It starts by presenting a high-level summary of why collateral is posted, then moves to addressing the types of analyses that might be useful for collateral negotiations, as well as the associated data requirements.   From there, the focus shifts to an example of the collateral formula, and, finally, a checklist is provided for managing the analytical collateral process.

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