Changing attitudes to collateral requirements in the insurance industry, coupled with wider commercial trends, are apparently persuading Bank of New York Mellon (BNYM) to recommend insurance trusts as an alternative type of collateral to letters of credit (L/Cs).

The bank describes itself as the largest manager of insurance trusts by value in the world.

Advantages

Insurance trusts act as "an alternative form of collateral and can be used in place of L/Cs," according to London-based vice president of global corporate trust for BNYM, Caroline Cruickshank.

A statement issued by the bank says the insurance trust has an advantage of being less expensive to create with no negative effects on the credit of the sponsor.

Market openings

The insurance trust may also find a place in a market where L/C issuing banks have become reluctant to extend credit as a result of the financial crisis.

London-based regional head of risk finance for Chartis Insurance, Matthew Latham, says security trust insurance agreements are starting to "crop up more and more" as collateral has become an issue in some markets.

Alternative means

"With everything happening in the financial crisis, the ability to get L/Cs, and the cost of those L/Cs, has obviously increased quite significantly," says Latham.

He says that as a credit risk insurer, Chartis would consider alternative means of collateral.

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