The banking report—trusts and letters of credit
SOME CREDIT GIVE US
The ability to post
collateral is becoming ever more important for insurers and reinsurers. Intelligent Insurer investigates why this is the case and how banks enable this service for their clients.
I
n a world where the capacity to demonstrate an ability to honour fi nancial commitments is becoming more important, tools such as letters of credit (LOCs) and trusts are becoming vital for insurers and reinsurers.
Take, for example, Tokio Millennium Re’s market solutions unit, which
works with funds invested in insurance linked securities. Tokio Millennium Re fronts these funds before transferring the risk back to them using swaps or a reinsurance agreement.
“But the key to this is that we require these trades to be fully
collateralised,” says Kathleen Faries, senior vice president at the unit. “We require collateral be provided to us, which means we conduct a lot
of business with banks with regards to LOCs and trusts. We do not want to take any underwriting risks on this business, so the counterparties we deal with provide us with full collateral to the aggregate limit on the risk they assume.
“These trades can range from $10 million to $50 million. This means we
must get collateral from the counterparty either in a trust, which would be cash or short-term securities, or an LOC from a highly rated bank.
“On the trust side, there are limited companies that provide trust services.
A few examples are, Wells Fargo, Deutsche Bank and Bank of New York Mellon. We generally get good service from all of them. Areas that are particularly important from a service standpoint are a quick turn around on legal agreements and easy Internet access to accounts and reports.
28 | INTELLIGENT INSURER | September 2011
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