As many businesses are painfully aware, insurance collateral obligations in support of loss-sensitive program(s) reduces liquidity otherwise utilized for business operations and growth. Given the diversity of risk that businesses face, it’s essential to implement effective risk and insurance programs to protect their assets and mitigate ultimate cost, while also minimizing the potential liquidity-limiting nature of these programs.

Many businesses have benefitted from moving to deductible, self-insurance, or alternative risk insurance programs as a way to effectively lower insurance premiums, improve cash flow, and gain better control of ultimate total cost of risk. Businesses have a limited variety of methodologies at their disposal to mitigate the potential impact of insurer collateral requirements. Businesses should explore ways to free up otherwise locked balance sheets by using a combination of off-balance sheet financing solutions and surety bonds.

This article will focus on off-balance sheet financing to address this challenge.

What is Insurance Collateral Financing (ICF)?

ICF is a balance sheet and liquidity management solution built to strengthen the traditional insurance collateral model. ICF enables companies to transfer their collateral requirements off their balance sheets through a substitute arrangement that fully satisfies insurance carrier requirements and gives them more capital to deploy to business operations and investment opportunities.

ICF also provides incremental financing that enables the business to satisfy its collateral obligation by releasing previously trapped liquidity and restoring balance sheets to their fullest potential. A third-party provider arranges and backs a replacement letter of credit in exchange for a financing fee. The financing fee is similar to the cost of a term loan. This financing solution is made further appealing to company CFOs due to its minimum security-backed nature, and its usual exclusion from financial covenants.

ICF has several advantages:

  • Speed: rapid funding process, with alternate Line of Credit (LOC) in place in 6-8 weeks
  • Size: accommodates a wide range of collateral needs (hundreds of thousands to hundreds of millions)
  • Timing: can be implemented at any time, independently of policy renewal date
  • Flexibility: collateral amount can flex up and down over time depending on your evolving needs
  • Seamless process: LOCs meet all the requirements of insurers
  • Cost: competitive against other sources of debt financing

Other operational advantages include:

  • Options: supports the transition to higher deductible, self-insured, or other alternative risk loss-sensitive insurance programs
  • Competition: enables the move to a more competitive insurer offering through collateral relief
  • Financing: new source of incremental liquidity for operations and business investment
  • Financial ratios: improved leverage ratios and frees up existing debt capacity
  • Off-balance sheet financing: typically excluded from financial covenants

If you’re interested in learning more about ICF and how it can benefit your business, please reach out to your Marsh McLennan Agency relationship contact.

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