Collateral and Letters of Credit
What this clause says
The Insured shall provide and maintain security in a form acceptable to the Company, in an amount determined annually by the Company based on estimated unpaid losses within the Deductible, which security may be adjusted at each anniversary.
What this actually means
On a large retention or deductible program the carrier pays claims first and bills you back for the amounts inside your retention. Collateral secures that credit exposure, usually as a letter of credit, cash or a trust, and it is recalculated annually as claims develop.
What it means for an operator
Collateral is not premium and it is returned as the underlying claims close, but it is capital that is unavailable in the meantime and it accumulates rather than resetting: each new policy year adds to it while old years remain open, so a program in its fifth year can be securing several years of retained loss at once. The real cost is usually not the letter of credit fee but the reduction in availability under your credit facility, which competes directly with acquisition and capital expenditure capacity. Two levers actually work: closing claims, because collateral tracks open reserves, and challenging the actuarial basis where your own development is better than the class assumption. Ask for a written release schedule tied to the runoff of each policy year rather than leaving the return to an annual negotiation.
Why the Policy Checker does not score this
This term is worth understanding and cannot be checked from a declarations page. There is no single field that would answer it, and scoring it from an assumption would produce a confident wrong finding, which is the one thing a tool like this must never do. It is defined here and left out of the check.
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