Captive insurers - insurance companies wholly owned by a company not involved in the insurance sector that provide cover for risks of the group to which it belongs - are turning away from letters of credit (L/Cs) as a form of collateral, according to speakers at a recent captive insurance conference.

They say trusts on the other hand are becoming more commonly used as collateral for the conventional insurance companies that provide services for a captive insurer.

Collateral concerns

Speakers at the recent Vermont Captive Insurance Association conference focusing on the industry's responses to the credit crunch highlighted that issues to do with collateral were of prime concern.

Captives are often required to post a L/C, cash or a trust as collateral for the domestic insurance company that provides claims or administrative services to a captive insurer, according to Zurich Financial Services business manager for captive solutions, James Riley.

Trust operations

But while L/Cs used to be the most common vehicle, Riley reckons tighter bank credit has prompted captives to turn more often to trusts for collateral.

Trusts apparently operate much like savings accounts out of which money can be allocated to pay whatever obligation is expected from the fronting company that provides services to a captive insurer.

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