Our co-founder Karin Landry, was listed in Captive International’s Most Influential Women in Captive Insurance, which highlights leading female figures in captive insurance and alternative risk financing. You can find the full list here.

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

Every summer, the Vermont Captive Insurance Association (VCIA) hosts one of the most influential events in the captive industry. This year’s 40th Anniversary Conference in Burlington brought together a record number of captive professionals, regulators, and service providers to reflect on the industry’s evolution — and chart a course for its future. Here are some popular topics discussed this year.

1) Risk Dynamics & Strategic Innovation

Captives must increasingly address risks like social inflation, cyber threats, and volatile economic trends. VCIA delivered cutting-edge insights through sessions that equip professionals to adapt and thrive in uncertain environments.

– Climate Transition, Increasing Volatility, and the Role of Captives – Explored how captives are responding to shifting climate-related exposures and market turbulence.

– Unpacking the Impact of Covid, Inflation, and Social Trends – Examined how macroeconomic and societal shifts are influencing captive performance.

– PFAS: Everyone Has Exposure — Understanding the Complexities – Delved into evolving environmental liabilities and how captives are navigating emerging pollutant risks.

2) Regulation, Taxation & Captive Structure

Keeping abreast of regulatory requirements, tax strategies, and structural changes is foundational for captive resilience. This year’s VCIA sessions offered clarity, tools, and frameworks for crafting compliant and robust captive programs.

3) Leadership, Culture & Captive Ecosystem

With 40 years under its belt, VCIA continues to invest in the next generation of industry stewards and deepen community ties—emphasizing inclusion, mentorship, and collaboration as they build toward the future.

– Captive Immersion – A foundational, full-day workshop led by Vermont DFR, designed to onboard newcomers with a comprehensive look at formation, regulation, and operations.

– Risk Manager Round-Robin: Captive Evolution – Offered interactive discussions on how captive programs are evolving in response to changing organizational needs.

– Transforming Your Captive – Mergers, Re‑Domestications and Conversions – Highlighted strategic options for managing captive growth and lifecycle through structural transformation.

VCIA 2025 delivered a meaningful blend of education, strategy, and community. As the largest captive domicile in the world, Vermont continues to set the standard for innovation and oversight, and having a strong platform like the VCIA Conference to showcase that leadership is essential. Whether you’re launching your first captive or optimizing a mature program, VCIA remains one of the most valuable gatherings to learn, connect, and help shape the future of the industry. We’re already looking forward to VCIA 2026!

Spring Consulting Group, An Alera Group Company was listed as a finalist in Business Insurance’s 2025 U.S. Insurance Award Finalists. You can find the full list of finalists here.

Spring Consulting Group, an Alera Group Company, has been shortlisted in Captive Review’s 2025 US Awards in the following categories:

You can access the full shortlist here.

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.