Spring Consulting Group is pleased to announce that T.J. Scherer, Vice President, has been appointed to the Board of Directors of the Texas Captive Insurance Association (TxCIA).

Since joining Spring Consulting Group, T.J. has played a key role in the growth and execution of the firm’s alternate risk practice. This appointment highlights his leadership and expertise within the risk management community.

In his role on the TxCIA Board, T.J. will collaborate with industry peers to support the association’s mission through strategic oversight, regulatory guidance, and industry advancement, as Texas continues to strengthen its position as a leading captive domicile.

T.J. brings more than 10 years of experience advising organizations on complex risk management and captive insurance programs. His background in financial reporting and program governance provides a strong analytical perspective aligned with TxCIA’s commitment to fostering a stable and effective captive insurance environment.

Spring Consulting Group congratulates T.J. on this appointment and looks forward to his contributions to the TxCIA and the broader captive insurance community.

In a recent interview on captive.com, our VP, TJ Scherer speaks about key insights when it comes to creating a captive and how it can impact renewal cycles and stakeholder preferences. You can find the fill interview here.

In a recent article from captive.com, our Vice President, TJ shares his perspective on how captive insurance programs can be leveraged to reinsure surety bonds, offering new avenues for capital efficiency and enhanced risk management. You can find the full article here.

Collateral requirements can come as a confusing surprise for insureds with large deductible programs or captives with fronted arrangements. In this article, we’ll answer some of the most common questions around when collateral is needed, how carriers determine these requirements, and how an independent actuarial analysis can provide clarity and, in some cases, reduce the collateral burden.

When Is Collateral Required?

Insurance carriers are in the business of assuming risk in exchange for a premium. So why would they require collateral on top of that? The answer lies in scenarios where the carrier takes on credit risk. This happens in two common situations:

  1. Large Deductible Programs:
    In a large deductible arrangement, the insured is responsible for the first layer of payment in any given claim. This exposes the carrier to the risk that the insured may be unable to pay, due to insolvency or other financial issues. Since this credit risk is not covered in the premium, collateral (e.g., letters of credit, cash, or trust funds) is required to secure future reimbursements.
  2. Captive Fronting Arrangements:
    In a fronted captive structure, a commercial insurer (the “fronting” carrier) issues the policy to the insured and cedes all or a portion of the risk to the captive via reinsurance. If the captive cannot fulfill its obligations (e.g., it becomes insolvent), the fronting carrier remains liable for claim payments. To mitigate this credit risk, the carrier requires collateral from the captive based on the expected liabilities it is ceding.

It is important to note collateral goes to support the ceding insurer’s Schedule F requirements in the U.S. statutory accounting framework.  Schedule F requires collateral for unauthorized reinsurers or increased risk based capital charges.

How Do Carriers Set Collateral Requirements?

Collateral requirements are typically based on the estimated unpaid losses retained by the insured or a captive, whether through a large deductible or a captive reinsurance agreement. The process typically includes the following steps:

  1. Estimation of Ultimate Losses:
    For each policy year, the carrier first estimates “ultimate” retained losses and loss expenses for the insured or captive using actuarial methods. These ultimate losses include the following three claim components:
    • Paid losses (claim payment on closed and open claims)
    • Case reserves (reserves set typically by claims administrators for known open claims)
    • IBNR (incurred but not reported claims, including late-reported and under-reserved claims)
  2. Calculation of Unpaid Losses:
    Unpaid losses = Ultimate losses – Paid losses
    This amount includes case reserves and IBNR.
  3. Adjustments Based on Financial Strength and Other Factors:
    Carriers may reduce required collateral depending on the insured’s financial standing, claims-paying history, or other negotiated factors, such as expected payments over the next policy period.

Depending on the carrier’s risk appetite and underwriting philosophy, they may require collateral above and beyond the actuarial estimate of unpaid claim liabilities. For fronting arrangements, the ceding company often considers the limits of the reinsurance contract with the collateral requirement to satisfy their reporting requirements. Additionally, since many captives are not rated, their financial strength cannot be considered as much as the insured with a large deductible plan. As a result, a fronting carrier’s required collateral is often greater than collateral for a large deductible program at a similar retention. This variability makes it critical for insureds to understand and, when appropriate, challenge the assumptions behind collateral determinations.

Another important issue to understand with collateral obligations is the staking of policy year collateral particularly with long tailed lines. With each additional policy year of exposure collateral will grow as the reserve need grows to payout unpaid claim liabilities. This is driven by factors such as the payment pattern, exposure size, and trend but may be offset by claims from older years settling and closing out. This is illustrated in the next section.

Explanation of why IBNR and Reserve Development Assumptions So Important

The inclusion of IBNR in the calculation of unpaid liabilities for the retained losses of the insured or captive ensures that liabilities are not understated, especially for more recent policy years that are still developing. Without IBNR, estimates would only reflect known and reported claims, missing the potential for future loss emergence. Actuarial assumptions, such as loss development factors and trends, play a large role in determining the size of IBNR and thus the total collateral needed related to each policy year.

Graphical models (as seen in other collateral guidance) often illustrate that unpaid losses increase over the first few policy years with a carrier, then flatten out as payments catch up and fewer legacy claims remain. However, any increase in deductible levels or rapid expansion in exposure can restart the “ramp-up” of collateral needed. This is illustrated in the following graphic between 2019 and 2020 with a doubling in company size. Also illustrated is the stacking of collateral for a long-tailed line like workers’ compensation. At each policy year renewal historical reserves decrease as claims are paid and closed but prospective policy year exposure is added.

How Can an Independent Actuarial Review Help?

Collateral is often based on the carrier’s actuarial projections, but these projections vary widely depending on the methodology, assumptions, and data quality. An independent actuarial review offers the following benefits:

Here are two real-world examples of how an independent analysis made a difference:

Case Study 1: Workers’ Compensation Collateral Reduction

A Florida-based employer approached us with concerns over their self-insured workers’ compensation collateral. Their existing independent actuary had supported a collateral requirement of approximately $1M. Upon review, we found the prior analysis used conservative loss development factors inconsistent with actual experience. Our revised projections reduced the necessary collateral to under $400K, a 60% reduction, without compromising conservatism or adequacy.

Case Study 2: Auto Liability & Workers’ Compensation Program

A private equity-backed client with a multi-state deductible program was facing significant collateral hikes from their carrier. Our team conducted an independent review and found that the carrier’s actuaries used industry-standard payment patterns, which were misaligned with our client’s much faster claims payment history. By recalibrating the payment patterns and addressing a few minor methodology concerns in a call with the carrier’s actuaries, the client’s collateral requirement was reduced by over $1 million.

When a Collateral Requirement Is Justified

Not every independent analysis leads to a reduction. In some cases, we’ve found the carrier’s requirement to be reasonable or even favorable based on the insured’s data. Factors such as competitive pressure, strong credit ratings, or favorable development may contribute to a conservative collateral stance. Even then, an independent report helps the insured understand the process and strengthens their position in negotiations.

Alternative Program Structures to Avoid Collateral

An actuarial analysis can also inform a longer-term strategy. For example:

These strategies must be evaluated with regulatory, financial, and operational considerations in mind, but they are worth exploring for insureds facing increasing collateral burdens.

Collateral requirements are a critical but often misunderstood part of large deductible and captive insurance programs. Independent actuarial analysis not only sheds light on how those requirements are set but also equips insureds with the tools to question assumptions, potentially reduce collateral, and explore smarter program structures. Whether validating the carrier’s position or uncovering opportunities to save, actuarial expertise can be a powerful asset in navigating the complexities of collateral.

Title:

Actuarial Consultant

Joined Spring:

February 2021

Hometown:

Burlington Vermont has been my home for the last 10 years, but I grew up in Allentown, PA and Mountainside, NJ before that

At Work Responsibilities:

Prepare and review actuarial reports for reserving, pricing, and Statements of Actuarial Opinion for insurance or captive insurance company clients.  Prepare and present loss estimates and financial forecast for clients’ prospective captive formations. Work with clients to source data inputs as well as present findings and discuss impacts.

Outside of Work Hobbies/Interests:

I like getting active outdoors running or biking on trails nearby or visiting the beaches here in town.

Fun Fact:

I go through phases where I cook a lot. I learned a good pizza dough in Spring 2025 and have made approximately 50 pizzas since.

Describe Spring in 3 Words:

Collaboration, flexibility, and excellence

Do You Have Any Children?

Yes, my son Bruce (13)

Favorite Food:

Coffee, pizza, lo-mein, ribs, wings, donuts, celery, raspberries

Favorite Place Visited:

Montreal during the summer

Our VP, TJ Scherer, was quoted in an article from Captive.com, titled “Property Captives Flourish Despite Softening Market”, he explained how the softening P&C market has allowed for more breathing room for employers; you can find the full article here.

As society increasingly pivots towards clean and green energy solutions, driven by the imperative of sustainability and the dramatic effects of climate change, the energy landscape is undergoing a profound transformation. Companies across all industries are embracing renewable alternatives and adopting environmentally conscious practices. This shift can lead to many obstacles when it comes to liabilities and coverage. Last week, I had the pleasure of attending the International Risk Management Institute (IRMI)’s Energy Risk & Insurance Conference (ERIC) which tackled this very issue. Experts across the risk management industry convened to discuss emerging energy risks and potential solutions. I had the pleasure of presenting on this topic, “Captives—Too Late for Fossil Fuels or Too Soon for Green Energy?” and wanted to share some key insights.

The Legacy of Traditional Energy

For decades, traditional energy sources like coal, oil, and natural gas have served as the pillars of global energy infrastructure. These sources have powered industries, fueled transportation, and sustained economies worldwide. However, their reliance on finite resources and contribution to environmental degradation have brought their sustainability priorities into question.

While traditional energy remains deeply entrenched in global economies, its future is increasingly uncertain. Mounting pressure to reduce carbon emissions, coupled with the emergence of renewable alternatives, has catalyzed a shift towards cleaner energy sources.

The Promise of Renewable Energy

The rise of renewable energy technologies such as solar, wind, and hydroelectric power represents a socio-economic shift towards sustainability. These sources offer cleaner alternatives, reducing carbon emissions and mitigating the impacts of climate change. Their abundance and renewable nature make them promising candidates for a greener future.

However, the transition to renewable energy has its challenges. The intermittency of renewable sources coupled with the need for infrastructure investments, presents hurdles to widespread adoption. The inertia of traditional energy industries along with regulatory complexities further slow down the pace of transition.

The Role of Captive Insurance

Amidst this energy transition, captive insurance has been at the forefront for risk management teams trying to optimize coverage and reduce costs. With few regulations, many insurers are moving away from insuring coal and creating more inclusive policies for oil and gas. It is estimated that 62% of reinsurers now have coal exit policies and 38% have oil and gas exclusions as shift away from fossil fuels accelerates.1 Insurance coverages and costs coupled with sustainability priorities have many organizations questioning if switching to alternative energy sources is critical.

On the other end of the stick, insuring green/new energy has not been easy. Although we are seeing new coverages such as leakage insurance for CO2, and coverage for solar, hydrogen, and bioenergy, pricing and underwriting remain huge issues. With any new risks, there are still untested coverages and language that may lead to future conflict when claims are filed. Many insurers also worry about the scalability of the new coverages once many companies shift to green energy; how will the underwriting processes and pricing shift or scale once more companies adopt green energy?

This natural lack of transition had sprouted a giant funding dilemma of insuring energy companies. Although many large companies are self-insured and/or adopt captive insurance as a solution, often mid and smaller companies are stuck in no-man’s-land. Many of these companies are looking into alternative funding options, such as a group captive, to help share risks with similar organizations without paying obscene premiums. This allows mid and smaller energy companies to meet lender requirements at lower rates and reduce net costs through reinsurance.

Where are Things Headed?

I expect in the coming years we may see drastic changes in how energy companies are insured; a lot depends on how committed commercial insurers are to exiting certain industries and promoting new energy coverages. There seem to be certain lines/industries that scale faster, both with regard to comprehensive underwriting processes and pricing volatility. Another significant consideration is governmental/regulatory changes. With climate change as a major political issue, policyholders and insurance companies may need to adapt more quickly if regulations are passed pushing for the use of green energy.

In conclusion, the dichotomy between old and new energy and how to properly insure them is a hot-button topic in the risk world. As older energy sources, such as coal, are becoming more and more uninsurable, newer green energy sources are untested and challenging to underwrite. We are in an interesting position where insurance companies and policyholders know they must shift towards renewable energy but cannot properly insure it (yet). Although alternative funding options, such as captive insurance, have proved thus far to be a solution, there are still so many unforeseen variables that will undoubtedly affect how energy is insured.

1 https://global.insure-our-future.com/with-new-coal-uninsurable-insurers-start-to-move-on-oil-and-gas/

Our VP, TJ Scherer, was recently quoted in an article from Captive.com spotlighting how captive domiciles count captives differently, which can influence how people and organizations view successful domiciles. Check out the full article here.

During the Captive Insurance Companies Association (CICA)‘s Annual Conference this year, Global Captive Podcast was on the scene interviewing captive leaders. Check out our VP, TJ Scherer’s interview here.