Captive insurance companies should consider using captive trusts instead of letters of credit (L/Cs) as collateral according to a vice president at Wells Fargo.

Roger Quinn, who sells captive trusts, reckons they are less expensive than L/Cs and will provide the insurance subsidiaries of large corporations known as captive insurers with several additional benefits.

L/C alternative

Quinn told the 7th Annual Captives and Corporate Insurance Strategies Summit in June that in 2010, around 70 per cent of captive insurers used L/Cs as collateral.

But he argued that the spiralling cost of L/Cs since the 2008-09 financial crisis has now made them prohibitively expensive for captives relying on them for collateral.

Spiralling costs

Before the crisis, the cost of L/Cs for on a cash collateralised basis ranged from ranged between 15- 45 basis points, Quinn told delegates at the conference in Toronto.

He now reckons the pricing of similar L/Cs is in the range of 45-100 basis points, with the average being around 75 basis points.

Benefits

Captive trusts, in which the bank is the trustee, provide several benefits according to Quinn.

These include lower fees than those charged for L/Cs and freedom from the need to renew L/Cs each year.

A captive trust could also replace multiple L/Cs according to Quinn.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.