While cash is king, there are alternatives available to consider for financing capital or collateral requirements associated with captive, reinsurance and other alternative risk transactions.
This is an under-utilized area especially relating to new enterprise risk captive arrangements where owners’ domicile “partner” selection is often influenced by minimum initial start-up capital requirements.
Most owners are not even advised by their captive managers of alternative considerations, largely since managers simply want to close the deal as quickly as possible and keep matters simple as complexity, no matter the benefits derived to the client, delay and complicate formations making managers work harder for their share of the spoils.
In risk pooling arrangements where pooled premium is often retained for a significant period of time, an early release can be accommodated through collateral posting by one of these methods. (Sidenote: If you are involved in 3rd party risk pool facility that does not retain any collateral, you should be concerned about the integrity of such a pool as it is not best practice compliant – consider our Strategic Review services for owners of captives concerned about the quality and costs of their captive program).
Here is a snapshot of capital and collateral financing “vehicles” and applications:
- Cash or cash equivalent deposits;
- Letters of Credit, aka “LOC” (used for all manner of purposes in lieu of cash) – cons are they are invasive to issue and have re-occurring annual costs and often invasive reporting and analytic requirements to maintain;
- Trusts (often referred to as Reg. 114 Trusts) – pros include often less expensive or invasive as an LOC, no lengthy credit review process, income remains depositors.
The main advantages of Reg. 114 trusts include:
- assets remain on books of depositor,
- wide investment discretion within trust generally,
- accepted collateral for most domiciles and carriers,
- easy to set up and dissolve,
- can replace multiple LOCs,
- no annual renewal process.
It may even be possible to use existing real estate assets as corpus of Reg. 114 trust, preserving use of liquid elements of your business and personal investment portfolios.
Captive Experts LLC has relationships with providers of LOCs and Reg. 114 trusts for our clients. Also for clients of 3rd party managers who are admitted to play in our 3rd party risk pool.
For more information visit www.CaptiveExperts.com and www.UScaptive.com
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