Guy Carpenter Explains ‘Collateralized Reinsurance’ Transactions

Guy Carpenter has provided an answer to a rarely asked question, but one which increasingly affects insurers and reinsurers: namely, what’s involved in a collateralized reinsurance transaction?

Guy Carp explained that it “is one in which a market creates a trust account at the inception of the contract term and funds the account in an amount equal to the contract limit (less certain deductions).

“This funding mechanism provides the client with readily accessible funds in the event of a loss that are segregated from the other assets of the market and remains available even if the market becomes insolvent. A collateralized reinsurance transaction also requires a pre-negotiated release of assets in the trust fund back to the market if there are no losses or if loss development is less than the contract limit.”

The explanation also notes that “at the time of contract inception, the collateralized market will appoint a bank as trustee to establish a trust account funded to equal the limit of reinsurance coverage or an amount negotiated and agreed to by the collateralized market and the client.

“These trust agreements are negotiated between the bank, the collateralized market and the client, and must be compliant with local regulations to ensure clients can take proper credit for reinsurance.”

The bulletin also pointed out that “this process can take time to draft, review and finalize for signature. Guy Carpenter’s vast experience in structuring such trust accounts can help to streamline the process of establishing a trust account and negotiating a trust agreement with the bank trustee.

“Occasionally there may be a dual trust requirement on the placement, which may require a separate Collateral Holding Agreement for the collateralized market. The Guy Carpenter broker will verify that the necessary wording and documents are in place in relation to the reinsurance placement, the trustees and any state-specific mandates. Guy Carpenter’s extensive experience in structuring collateralized transactions can help to guide clients and streamline the process.”

In the conclusion the bulletin noted that “although the future direction of capital flows and (re)insurance pricing in the years ahead is impossible to predict, the new formats and structures for risk transfer created by the insurance linked securities (ILS) and collateralized reinsurance markets have become well-established elements of the risk transfer landscape.”

Source: Guy Carpenter