Insurance with a large deductible may seem like a simple way to reduce workers’ compensation or liability insurance costs. But appearances can be deceiving. The collateral your insurer needs to protect your credit risk can put a strain on your lines of credit or credit rating. Here are three cures for this common problem.

Cure 1 – Bail

A surety bond is a three-way contact between you, your insurer, and the surety bond. A surety bond is a promise that, in exchange for the premium you pay, the surety will meet your financial obligations if you are unable to do so. If you can’t compensate your insurer for payments that fall within the deductible, the guarantee will cover those payments.

Not all insurers will accept a bond as a substitute for cash collateral or letters of credit. They may not get full credit for the bond under statutory accounting standards. Collateral may require you to post collateral to issue the bond, which will reduce some of the benefits of this approach.

Cura 2 – Trust Account

An escrow account, which funds with cash or high credit securities, can be substituted for letters of credit. The cost of maintaining a trust account is usually less than the cost banks charge for LOCs, which means you can save money each year on collateral costs and not have to use lines of credit.

Securities approved for a trust account may not provide you with an attractive return. The money you save on administrative costs could be offset by lower investment returns.

Cure 3 – Negotiate with your insurer

The guarantee amount set by your insurer is calculated using several factors: the frequency and severity of your historical claims; your company’s credit rating; factors of social and economic inflation. Their actuaries use these factors to predict future amounts and timing of payments for claims that fall within your deductible.

An improvement in your credit rating, a change in business activity, long-term expectations for future business opportunities in your industry can all work in your favor. Talk to your insurer about these changes. Hire your own actuary to analyze your losses. Don’t assume your insurer’s warranty calculations are set in stone.

Bonus Cure – Loss Portfolio Transfer

If you have been in a large deductible insurance program for a number of years, you may be experiencing collateral “stacking”. This is the accumulation of collateral over several years to the point where you have substantial amounts of assets or credit tied to your insurer.

A claims portfolio transfer is a contract with an insurer or reinsurer to transfer its responsibilities for future claims in exchange for the payment of a premium. The LPT contract premium is determined by the anticipated timing and amount of your future claim payments, as well as the time value of money.

Many people think that a low interest environment would not be suitable for LPT as the discount factor will be very small. But releasing letters of credit frees up your lines of credit for other uses, and that alone may be worth buying.