“Here we are, a large corporation with significant assets, yet we have to post collateral to an insurance company?” This question has been posed to many risk managers by their corporate treasury department or Chief Financial Officer when arranging the collateral required under a large deductible insurance policy. In order to answer this question, its best to understand the comparison between a large deductible insurance product and a standard, guaranteed-cost insurance program.
Under a traditional guaranteed cost policy, the premium paid by the insured is used to cover the insurance carrier’s operating expense/profit and to pay estimated future claims. All covered claims under the traditional guaranteed cost policy will be handled and paid for by the insurance company.
With a large deductible policy, the premium paid is much lower as the insured is reimbursing the insurance company for losses within the large deductible. Consequently, the reduced premium paid by the insured is used to cover the operating expense/profit and to pay estimated future claims for losses above the insured’s large deductible.
Even though the insured is reimbursing the insurance company for claims within the large deductible, the insurance carrier is ultimately responsible for all claims covered by the insurance policy, including claims within the large deductible. If a policyholder cannot or refuses to reimburse the insurance company for claims within the large deductible, the insurance carrier is still obligated to pay for those claims. Consequently, an insurance company will seek collateral from the insured for the risk of non-reimbursement by the insured for large deductible claims.
Requiring collateral from insureds is not only a good business practice for insurers, it is also a key factor in the insurance company’s overall financial health. Various rating agencies and state insurance regulators routinely evaluate a company’s financial health and their ability to pay claims.
At the end of the day, the reduced premium is balanced by the need for collateral on a large deductible policy and provides the insured a cost effective option versus a traditional guaranteed cost insurance program.
For more information about collateral posting requirements, contact your ORRM Account Executive or visit the ‘Contact Us’ page on orrm.com.