Collateral Q&A With 1970 Group

Stephen Roseman, CFA

Today we are joined by Chairman and CEO of 1970 Group, Stephen Roseman, CFA. With over 25 years of securities, investment management and insurance industry experience, Stephen is a perfect candidate for a discussion on collateral. We hope you enjoy his insight as much as we do.


Q1: What collateral trends are you currently seeing from the carrier perspective?

Recent events and factors have been driving increases in carriers’ collateral demands within high deductible commercial insurance programs, including inflationary trends and more stringent underwriting, the latter due in part to scrutiny of insurers’ financial accountability by rating agencies and regulators (1).

Driven by inflation, both premiums and collateral requirements are predicted to increase significantly in loss-sensitive workers compensation, general liability, and commercial vehicle insurance programs in 2023.  Against this backdrop, carriers are expected to turn conservative in their assumptions of loss picks and are likely to pressure insured firms to accept higher retentions and collateral demands (2). Looking more closely at specific commercial coverages, in auto liability inflation is driving up the costs to repair and replace vehicles; distracted driving and rising medical costs also remain concerns (3).  A tightened labor market has resulted in relatively inexperienced hires in some sectors, impacting general liability, workers compensation and auto coverages. Workers compensation premiums and collateral requirements are further being driven by wage escalation.

The impact of the expected economic slowdown and recession will affect businesses unequally; those companies with risk profiles more vulnerable to reductions and fluctuations in revenue, cash flow, and liquidity ratios are more likely to be presented with increasing collateral demands by their carriers. The resulting diminishment in a company’s borrowing capacity will then require companies to pursue alternative financing strategies to counteract the increasing amounts of collateral trapped in their insurance programs.


Q2: What collateral trends are you currently seeing in terms of financing?

During this period of inflation, labor instability and slowing growth, executives have become increasingly concerned about the rapidly growing opportunity cost of tying up capital in insurance collateral obligations. The bottom line is that liquidity has become more precious, with companies needing accessible capital to react to rapidly changing economy-wide, industry and firm-specific conditions. Alternative financing will be required to manage business operations and/or capitalize upon new opportunities.


Q3: What advice would you give to companies facing collateral requirements for the first time due to a new self-insured or high deductible policy?

In most circumstances, a company benefits from the decision to self-insure by reducing their overall premium costs. Nevertheless, if not careful with insurance coverage design, companies adopting loss sensitive programs can wrestle with collateral requirements that impair balance sheets and reduce liquidity. When preparing to make the transition to high deductible insurance programs, companies should think more broadly about overall collateral management design.

Actuarial experts should be consulted to help businesses understand what can cause collateral amounts to change over time, including actual claims experience and macroeconomic factors. Firms should examine their letter of credit options with their bank and explore ways to free otherwise locked balance sheets using a combination of off-balance sheet financing solutions and surety bonds. Finally, sound financial management will help to maintain or even reduce collateral levels over time, as insurers will react to changes in cash flow from operations and liquidity and coverage ratios, specifically evaluating the ability of an insured client to finance operations without using available credit lines.


Q4: Do you have any tips for companies facing increased or more stringent collateral requirements from their carrier?

Companies have a variety of methodologies and solutions at their disposal to mitigate the potential impact of collateral requirements. Reducing the probability of claims thru the implementation of improved safety protocols is a self-evident strategy. In addition, companies should fully analyze carrier assumptions on projected claims. A good actuarial firm will take the time to understand an insured’s business, including growth projections, claim payment patterns, TPA reserving practices and changes in operations or state mix. This insight, combined with a solid foundation of actuarial knowledge, is crucial for effective advocacy and optimal collateral outcomes (2).

When analyzing capital needs for the year ahead, consider how liquidity (specifically, credit lines) trapped in insurance collateral impacts your ability to manage through revenue and expense fluctuations, and how it may affect your company’s ability to make planned or reactive investments in infrastructure or acquisitions. Then, consider reducing the opportunity cost of trapped collateral thru a risk financing solution like Insurance Collateral Funding (ICF). ICF is an off-balance sheet transaction involving the payment of an annual financing fee to a risk specialist like 1970 Group, usually in line with a company’s cost of debt. The transaction fully restores a business’ access to their credit lines.


Q5: How does the 1970 Group develop new offerings for collateral solutions?

1970 Group helps companies put their balance sheets to work by mitigating the unintended consequences of insurance program design, specially, the economic cost of capital tied up in insurance collateral. Our company evaluates a broad range of insurance programs, and we presently offer solutions for general liability, workers compensation, commercial auto, and professional liability coverages. We enter markets where we can bring unique value, and in some cases are the sole provider of a particular solution, including Insurance Collateral Funding. We are in continuous exploration with CFOs & executive teams, private equity operations and portfolio management teams, insurance carriers, banks, and insurance brokers.


Q6: Do you have any predictions for the future of how collateral requirements are handled?

The collateral challenge has grown into an estimated $300B and growing problem. As a result, insurance collateral analysis is no longer overlooked, and is becoming center stage in insurance program design and management. CFOs and company treasurers are looking to optimize their balance sheets to remain competitive. Executive teams will increasingly adopt new collateral relief solutions that alleviate capital lockup and release liquidity. This in turn will encourage the development of new, specialized financing solutions. Nearer-term, we believe the adoption of off-balance sheet financing arrangements like Insurance Collateral Funding will become the go-to-market strategy for corporate America in loss sensitive programs.

(1) Keeping Pace with Carriers’ Changing Collateral Requirements, Marsh.

(2) 2022 The Collateral Squeeze White Paper, Lockton.

(3) June 2022 Market Update, Lockton.


1970 Group is in the business of enabling remarkable companies to overcome their liquidity limitations.

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