Captive insurance companies - insurers that are wholly owned and controlled by their insureds - are paying over the odds for their collateral arrangements due to an inertia when it comes to exploring the use of captive collateral trusts instead of letters of credit (L/Cs) according to an industry expert.

Vice president of global capital markets institutional client services at Wilmington Trust, Robert Quinn, says that while more captives are starting to use captive collateral trusts, many captive owners and managers neglect the idea, often due to myths that do not stand up to scrutiny.

Cost advantage

Quinn argues that for a captive with a US$10 million collateral requirement, an L/C will cost between US$50,000 to US$75,000. It then needs to cash collateralise the L/C.

In contrast, he says a trust can be used with just an arrangement fee of around US$5,000 required.

Whereas most L/Cs need to be periodically renewed, trusts will continue until both parties agree to unwind them, Quinn added.

Increased interest

Speaking at the Bermuda Captive Conference, Quinn reckons that 20 years ago, only around 5 per cent of captives used trusts.

He now estimates the figure is closer to 35 per cent.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.