How does that prevent a company from seeking a new insurer?
While a prospective new carrier may offer advantageous pricing, its collateral requirement for the first year and the prospect of stacking that requirement for future years can overshadow cost-saving benefits, especially for a company with limited capital availability.
As a result of these factors, corporate risk managers should evaluate current insurance programs in conjunction with their financial objectives. Given the impact of collateral requirements on a company’s cash flow and available borrowing capacity, risk managers might do well to make some changes to the terms of deductible insurance programs.
In this environment, however, buyers should recognize that insurance companies have pressures, too. With tightening credit markets and a weak economy, insurance companies are at increased risk that clients might fail to reimburse deductible payments.
These defaults can range anywhere from a delay of payment to an actual bankruptcy resulting in a default on obligations owed to the insurance company.
How can companies benefit by pursuing a zero-collateral policy?
Property and casualty insurance brokers have watched premiums shrink and stagnate for the past five or more years. They understand that growth isn’t happening unless their clients grow, and collateral burdens hurt their clients’ ability to reinvest in new projects. Recognizing this axiom, brokerages are now offering zero-collateral deductible insurance programs that eliminate collateral requirements, freeing these funds in the form of cash or lines of credit for capital investments by their clients.
These insurance programs may still carry deductibles that allow customers to benefit from the cost and cash flow advantages. But rather than require collateral, the credit exposure is insured by an additional policy. As a result, there is no requirement to post collateral, which would otherwise be in place until all claims are closed, a process which can take many years from the program’s inception.
The value of these programs for clients can be tremendous, as it allows them to invest available cash and credit in the business and avoid tying it up with insurance companies.
With the help of an adviser, companies would be well-advised to look into the zero-collateral option.
Edward X. McNamara is senior vice president, regional sales director — East Central Region, at Aon Risk Solutions, a risk management and insurance brokerage firm with regional headquarters in Cleveland. Reach him at (216) 623-4146 or [email protected].
