Constructive Collateral Conversations Part 3: How to Help Both Insureds and Insurers Simultaneously

Discontent related to the collateral requirements from large deductible and other alternative risk programs are felt by both the insured company and the insurance company.  In the first article, we suggested ways for the insured to minimize such discontent, and we did the same for insurers in the second article. But are there ways that can help both simultaneously?

While this may seem overly simplistic, the root of the issue with both insureds and insurers’ discontent is information asymmetry. Said more plainly, there is a gap in understanding between the two sides, an overall lack of transparency. What can be done to bridge said gap?

Just as some folks who frequent In-N-Out Burgers may not be aware of the existence of a secret menu, insureds have a less mysterious way to communicate with their insurer, and thus improving communication and increasing transparency.

Based on my experience working for one of the largest writers of workers’ compensation deductible policies and consulting for insureds on the other end of the table, I’ve seen how an insured having an independent actuarial analysis as part of the submission almost always led to the insurer performing a more thorough review of collateral costs.  In the absence of an actuarial report or more detailed information about an insured, the determination of collateral need for the insured leans exclusively on the insurer’s internal company models, which are not always that robust, are often biased conservatively and may even just use one method.

An independent actuarial analysis provides the insurer with more insured-specific information that will help the insurer efficiently analyze the collateral outside of a standardized model. Further, if the analysis is performed by someone trusted by the carrier, the analysis has greater credibility which ultimately can be given more weight for gray areas. An independent actuarial analysis helps the insurer save time, potentially presents new information that they did not otherwise have, and connects the actuary with a trusted business partner in the same tradecraft.

The picture I painted is not always so rosy – the insured company, of course, does not always agree with the final collateral decision. That said, when I worked on the carrier side, whenever we received an independent actuarial report we always “sharpened our pencils” and, more often than not, did change the collateral calculation in a way that was favorable to the insured more so than if no independent actuarial report was provided.   

Overall, we have seen the benefits of having an independent actuary and his/her analysis bridge the divide between insured and insurer, by saving the insurer time and expense and giving greater credibility to the insured. Along with the approaches we’ve discussed specific to insureds and insurers, these collective steps can make a big difference in turning collateral from a necessary evil into a positive and even advantageous part of each side’s business.

Frank Huang has more than 15 years of actuarial consulting experience serving a wide range of clients, including serving as ADP’s Chief Actuary.