How much collateral will a carrier require on a large retention program?

On a large deductible or retention program, the carrier typically pays claims from the first dollar and bills you back for the amounts within your retention. That makes the carrier your creditor for as long as the claims take to develop, which in senior care is years.

Collateral secures that credit exposure. It is not premium, it is not a fee, and it is returned as the underlying claims close, but it is capital that is unavailable to you in the meantime.

The starting point is an actuarial estimate of the losses within the retention for the policy year, often expressed as the expected retained loss at an elevated confidence level rather than at the mean, plus a margin.

The amount is then reset annually and it is cumulative across years, because prior years remain open. That is the part operators underestimate: collateral does not reset each year, it accumulates as each new year is added and only releases as old years close, so a program in its fifth year can be securing several years of retained loss at once.

Your loss history, your financial strength and the length of your relationship all move the margin. A financially strong operator with clean development posts less than an identical operator with adverse development.

A letter of credit carries a fee, commonly a modest annual percentage of the face amount, and it usually reduces availability under your credit facility dollar for dollar. That second effect is the real cost, because it competes directly with acquisition and capital expenditure capacity.

Cash collateral costs the opportunity value of the cash. A trust arrangement can allow you to retain the investment income, which makes it attractive at scale and more administratively involved at smaller size.

Put the collateral cost into the comparison when evaluating a higher retention. A program that saves premium but consumes borrowing capacity is not obviously cheaper for an operator with a growth pipeline.

Close claims. Collateral tracks open reserves, so an aggressive and well-supported claim closure program releases collateral directly, and that is a lever the operator controls.

Challenge the actuarial basis with your own data where your development is better than the class assumption. Carriers will negotiate the confidence level and the margin, particularly at renewal and particularly with several years of favorable development to point at.

And ask for a release schedule in writing, tied to the runoff of each policy year, rather than leaving the return to an annual negotiation.