Why does my insurer want a letter of credit?

Under a self-insured retention or a large deductible program, the insurer is exposed to your credit. It may pay claims in the first instance and look to you for reimbursement, or it may rely on you to fund the retention directly. Either way, if you cannot pay, the insurer does.

Collateral removes that exposure. A letter of credit issued by your bank in the insurer favor lets it draw if you do not perform, which is why the size of the facility tracks expected losses rather than premium.

Because senior care operators are usually carrying real estate debt. A letter of credit facility consumes borrowing capacity at the same bank and against the same balance sheet that supports your mortgage, your acquisition line and your working capital.

That makes collateral a direct competitor for capital the business actually runs on, and it is the reason a retention decision belongs in a conversation with the CFO and the lender rather than inside an insurance renewal. An operator planning a HUD 232 refinance should know the collateral requirement before agreeing to the retention that creates it.

Collateral does not release when the policy expires. It releases as the claims from that policy period run off, and in a long-tail class that takes years. An operator who moves to a first-dollar program still has collateral posted for the retention years behind them.

Ask specifically: how is the required amount recalculated as claims close, how often is it reviewed, and what is the typical release schedule. Those answers turn an open-ended obligation into a forecastable one.

The amount, to a degree, because it is calculated from expected losses and expected losses come from actuarial assumptions you can question. Ask for the calculation.

The form, sometimes. Alternatives to a letter of credit exist, including trust arrangements and surety, and their balance sheet treatment differs. Whether any of them is better for you is a question for your CFO and your lender rather than for your broker alone.

The review cadence, usually. An annual recalculation that reflects closed claims is materially better than a static requirement that never comes down.

Taking a larger retention in exchange for a lower premium looks like a saving until the collateral is priced. Once it is, the comparison is between a premium reduction and a reduction in borrowing capacity, which are not the same currency.

For an operator with abundant liquidity and no near-term financing need, the trade is often good. For one planning an acquisition or a refinance, it frequently is not, and the insurance conversation is not where that gets discovered.