Risk Management

Collateral and Escrow: 6 Best Practices for Getting Your Money Back from Insurance Carriers

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Want to get a little (or larger) end-of-the-year bonus? Make sure you follow our six best practices for getting your money back from insurance carriers. But first, a few definitions:

  • Collateral is posted on loss sensitive accounts to secure expected future financial obligations.
  • Escrow is posted on loss sensitive accounts as an active claims payment account.

Most large risk management programs carry seven and sometimes up to eight figures of collateral and six to seven figures of escrow across all their current legacy programs.

6 Best Practices for Reducing Your Collateral and Escrow

  1. Perform an annual check-up. Companies should review collateral and escrow analyses annually. Most carriers and third party administrators (TPA’s) won’t review analysis without being prompted, if you’re not asking your carriers and TPA’s to review this information, they will hold on to your funds indefinitely. Be extra vigilant about legacy collateral and escrow – these carriers will almost never return these amounts without being prompted. As H&R block would say, Get Your Billions Back, America!
  2. Review your collateral architecture. Businesses should regularly review collateral structure to best match their business and financial needs. As operations and financial goals of an organization change, current collateral structure may no longer be aligned. Remember, letters of credit aren’t the only type of collateral accepted by carriers. Often, carries will accept alternative forms of collateral including: bonds/surety, trust, cash, and capital held in captives. Carriers will frequently allow insureds to combine collateral instruments to satisfy total requirements.
  3. Avoid posting collateral in the first place. Take advantage of offers to pay extra charges or fees at renewal to reduce or eliminate down the collateral requirements.
  4. Don’t let the insurance carrier hold the pen on collateral. Take control of your collateral and escrow analyses by preparing your own loss analysis. By running your own figures, you’re in a position of strength to negotiate any differences with the carrier numbers. Otherwise, you’ll be stuck arguing with a carrier that won’t budge from their initial figure.
  5. Fight fire with fire. In certain situations or industries, engage your actuary to pre-analyze your collateral position. Typically this includes industries with very high loss rates, such as retail or transportation. Bring your own actuary to discussion and level the playing field when asking for reductions or more realistic figures – don’t get stuck negotiating with the carriers’ actuaries all alone.
  6. Mind the gap. Carefully review claims that are included in your escrow analysis. Payment transactions from three types of claims should be excluded from your analysis. Closed, settled, or insured (breached deductible/retention) claims should not be included in the analysis. Since these claims will no longer be funded by the insured, they should be included in the go-forward escrow funding analysis. Many vendors will include all claim payments, without excluding now-unfunded claims.  Be mindful of claims that can be excluded.

Risk International has eliminated or reduced collateral by tens of millions of dollars in the last decade.  During that same time, we’ve also been successful in returning millions of dollars in unnecessary or overfunded escrow accounts.

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The Insider Blog is an independent advocate for industry-wide change that uncovers waste and addresses best practices, trending topics and need-to-know information for chief financial officers, risk managers and benefits managers who need to improve the bottom line.

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