I told my client the collateral would come back eventually, and they asked me when, and I didn't have a clear answer. What should I have said?
Here's what you should have said. Collateral never fully comes back while your client is in the captive. It stays in place the entire time they're a member. And if they ever exit, it stays in place until all the policy years they were part of have fully closed out. That can take five to seven years after they leave. So if your client is thinking about collateral as something they'll get back soon, that's not the right mindset. This is a long-term play, and they need to understand that going in.
Now here's the part that changes the conversation. While the collateral sits there, it earns investment income. Your client isn't just watching that money do nothing. It's working. And as they start earning underwriting profit from the captive, those distributions can be applied directly to offset the collateral. At that point, the captive is essentially funding its own security deposit. They're playing with house money.
There's also something worth knowing about how collateral gets reviewed over time. It's not a fixed number that never changes. If your client's operations change significantly, either growing substantially or pulling back, the collateral requirement gets reviewed. The fronting carrier wants as much protection as they can get. Our job is to ensure the collateral is sufficient to protect the captive, but not more than it needs to be. We're managing that on your client's behalf.
The honest answer to when they get it back is this. If they stay in the captive and perform well, they'll see the value of that collateral come back through underwriting profits and investment income over time. If they choose to exit, they need to understand that the money stays until every policy year is fully closed and all potential claims from those years are resolved. That's the nature of liability insurance. Claims don't always show up the day they happen.
This is the long-term play. And the agents who set that expectation clearly upfront are the ones whose clients never feel surprised or misled down the road.
It's always your client. Never ours.
Topics:
