Posted by Richard Klumpp on Wed, Jul 20, 2011
In recent years, a Regulation 114 Reinsurance Trust has become easier to implement and increasingly more cost-effective.
A cost comparison between a Letter of Credit and a Reg. 114 Trust makes a compelling case for the Reg. 114 Trust option.
The reasons why Reg. 114 Trusts have gained such wide acceptance include:
1. Annual Cost Savings -- The annual cost of a trust can typically be 80% less than the cost of a letter of credit. While the difference will not be as dramatic for insured entities with spotless credit, a difference is still likely to favor the trust. And for entities with weaker credit, the difference may be even greater since letter of credit costs between 100-200+ basis points are not unusual.
2. Potential Increased Earnings -- In addition to benefits on the cost side, a Reg. 114 Trust can offer financial advantages on the earnings side. While there is a limited range of investment vehicles for a Reg. 114 Trust, a capable trustee will still be able to identify approved investment vehicles that offer incrementally higher yields.
3. Additional Returns Possible -- Most Reg. 114 Trust Agreements allow any increase in the value of the invested assets beyond the amount pledged as collateral to be returned to the insured. Because of this, incremental yield differences can have ongoing financial benefits to the captive and, by extension, to the insured entity. These benefits are in addition to the cost differences shown in the table above.
When carefully structured, a Reg. 114 Trust can play a prominent role in maximizing the potential of any captive insurance entity. Thus, the potential advantages of a Reg. 114 Trust should be an important part of any captive feasibility study.
Free Download: How Reg. 114 Trusts Work – For an informative guide to the potential benefits of providing collateral with a Reg. 114 Reinsurance Trust, download “ Reg. 114 Trusts: How They Work, Who Can Benefit, and Why They’re Not All Alike”
Wilmington Trust neither claims to nor provides legal or tax accounting services. Clients should consult professional tax and legal advisors regarding favorable tax treatment of any particular strategy.
Posted by Richard Klumpp on Wed, Jul 13, 2011
Thanks to its increasing acceptance, setting up a Regulation 114 Trust has become easier and more cost-effective.
Like captives themselves, the first Reg. 114 Trusts were relatively costly to establish, which limited their appeal to large entities. Today, just as the cost of setting up a captive has fallen, so has the cost (and difficulty) of setting up a Reg. 114 Trust. Reasons for these improvements include:
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Model Documents Now Available -- An experienced Reg. 114 trustee will be able to work from existing model documents that have already been approved by regulators. These model documents reflect the comments and business needs of a wide range of insured entities and their counsel.
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Collateral Management Options -- There are various ways to set up the investment of collateral assets. These assets can remain invested in a static pool of investments chosen at trust inception, or they can be actively managed. In this second case, the manager may be the insurer, the trustee, or a third-party investment manager.
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Variety of Investment Choices -- Whether the captive chooses a static approach or an active one, all funds must be denominated in U.S. dollars and invested in eligible instruments. Moreover, this wide variety of instruments includes cash … CDs issued by U.S. banks … U.S. federal and state obligations … short-term instruments and obligations of U.S. institutions (both rated at least A) … and money market funds.
When establishing a Reg. 114 Reinsurance Trust, it is important to review both structural and investment options. Although a Reg. 114 Reinsurance Trust is less costly and quicker to implement today than in years past, input from experienced Reinsurance Trust professionals should be an important part of every captive feasibility study.
Free Download: How Reg. 114 Trusts Work – For an informative guide to the potential benefits of establishing a Reg. 114 Reinsurance Trust, click here.
Wilmington Trust neither claims to nor provides legal or tax accounting services. Clients should consult professional tax and legal advisors regarding favorable tax treatment of any particular strategy.
Posted by Richard Klumpp on Wed, Jul 06, 2011
To confirm its ability to pay claims and avoid regulatory problems, a captive insurance entity must post sufficient collateral.
Some collateral options offer greater benefits than others. A Reinsurance Trust (also known as a “Reg. 114 Trust” or “Collateral Trust”) has become an increasingly popular alternative to using current assets or increasingly difficult to obtain letters of credit. Here is how a Reg. 114 Trust works:
- A Reinsurance Trust holds cash and marketable securities to cover potential claims. In the most common Reg. 114 Trust configuration, the captive places assets in a trust with the fronting insurer named as beneficiary.
- The trust is established and administered by the trustee (typically a bank), and the trustee also holds the collateral assets.
- In the event that the captive is unable to meet its insurance liabilities, the trustee may direct that some or all of the collateral assets be transferred to the fronting insurer. The fronting insurer also has the right to direct the trustee to release funds to it for the payment of claims.
- While the captive in this arrangement may be onshore or offshore, the Reg. 114 Trust must be onshore. The collateral remains in the trust and can only be removed with the consent of the beneficiary. The value of the collateral in the trust is the initial collateral minus allowable debits (commissions and claims) plus investment income earned on the collateral.
Although using a Reg. 114 Trust as the preferred collateral option is easier than alternative approaches, it still must be done with care. For this reason, an in-depth review of the potential advantages of a Reg. 114 Trust should be an integral part of every captive feasibility study.
Free Download: How Reg. 114 Trusts Work – For an informative guide to the potential benefits of providing collateral with a Reg. 114 Reinsurance Trust, download “ Reg. 114 Trusts: How They Work, Who Can Benefit, and Why They’re Not All Alike”
Wilmington Trust neither claims to nor provides legal or tax accounting services. Clients should consult professional tax and legal advisors regarding favorable tax treatment of any particular strategy.
Posted by Richard Klumpp on Wed, Jun 29, 2011
A captive insurance entity is typically required to post collateral as proof that it can pay its claims when providing reinsurance.
Although cash and letters of credit are most often used for collateral, many captive insurance entities now use a Reinsurance Trust.
A Reinsurance Trust (also known as a “Reg. 114 Trust” or “Collateral Trust”) holds cash and marketable securities to cover potential claims. A growing number of captive insurance entities are selecting a Reg. 114 Trust for the following reasons:
Wide Acceptance -- Reinsurance Trusts are acceptable in nearly all domiciles, making them the most versatile collateral choice regardless of location of the captive insurance entity.
Reduced Interest Risk – Unlike letters of credit, Reinsurance Trusts do not run the risk of changes in interest rates (re-pricing) or periodic renewal at less attractive rates.
Greater Control – Through active portfolio management, Reinsurance Trusts provide two significant advantages: greater potential for increased return on investment and increased credit availability as the value of investments increase.
Operational Advantages -- Even when compared with a fully collateralized letter of credit, a Reinsurance Trust provides greater overall economy. Unlike letters of credit, it requires no active management and negotiation.
Whatever collateral option is ultimately chosen, it is important to review the pros and cons of all options when forming a captive insurance entity. For this reason, an in-depth review of the potential advantages of a Reg. 114 Trust should be part of every captive feasibility study.
Free Download: How Reg. 114 Trusts Work – For an informative guide to the potential benefits of providing collateral with a Reg. 114 Reinsurance Trust, download “ Reg. 114 Trusts: How They Work, Who Can Benefit, and Why They’re Not All Alike”
Wilmington Trust neither claims to nor provides legal or tax accounting services. Clients should consult professional tax and legal advisors regarding favorable tax treatment of any particular strategy.