Alternative Risk Management
LEX LIQUIDITY RESERVE
Why Lex LLR?
LLR wasn’t created just to save our clients’ money; we created it to help them improve the way they buy insurance - to help them better protect cash flow, reduce its volatility from events of uncertain timing and therfore strengthen creditworthiness. LLR does this by giving clients a fully provisioned Reserve for their chosen level of aggregate first loss retention on day 1, but one they can spread the cost of by building it in their own bank account over an extended term, typically 3 years. These retained risks, such as bad debt reserves and insurance deductibles, are often not cash provisioned. Yet, few insurers offer a means to finance these risks without involving captive insurance services. Increasingly, it is these gaps in traditional cover that will become harder to fund cost effectively as banks standby credit costs and interest rates rise.
LLR is currently used as a substitute for cash collateral that funders require for large deductibles on trade credit insurance policies that support trade receivables-backed finance deals .However, the methodology can be applied to many areas of insurance and finance. Lex recognises that insurance isn’t just about ensuring claims are paid but that sudden demands on our clients increasingly precious cash are reduced and funded smoothly so cash can be used most productively, which is to help business grow.
How Does a €1M LLR Work?
- Company contracts to pay €27,778 per month into its own bank account over a typical 3 year term, immediately creating a €1M LLR which is assignable.
- Company has the right, but not the obligation, to claim up to the contract value from the insurer should insufficient funds have accumulated in the bank account at the time of loss to settle its risk share in full.
- An insurer covers the timing risk in return for a small premium and charge a competitive rate on funds claimed.
- All cash in the bank remains the asset of the company’s during the term.
- Pricing: A commitment & establishment fee of 2-4% plus a premium on the unfunded liability calculated at 0.5-5% p.a. depending on the company’s credit strength.
Lex Risk Solutions are developing this simple and proven product to help clients eliminate more liquidity risks. Property, business interruption, catastrophic risks, liability, product recall, cyber and environmental are some of the classes where our clients can reduce their sunk premiums and purchase insurance above a level of retained risk appetite. In fact, we believe companies are exposed to critical risks like reputation that traditional products don’t address. Lex aims to identify, finance and transfer such risks more cost effectively to better protect debt serviceability, cash flow and financing costs.
- Lex Risk Solutions would be pleased to review your current insurance policies, risk gaps and retained risks
- We would carry out a forensic examination to Identify risks gaps, reduce financing costs or cash currently trapped as collateral that could be substituted with the LRS
- LRS will recommend an insurance structure that enables a company to fund these risk retentions, close risk gaps and reduce their sunk insurance cost.
- Solutions can be structured for an individual entity or portfolios of risks where risk characteristics are shared by separate legal entities.
- Where appropriate, we would seek to reduce a company’s reliance on letters of credit, overdrafts and bank term loans.
Three Distinct Product Suites:
|INSURANCE – FUNDED DEDUCTIBLES – ENDORSED ONTO EXISTING POLICY|
|FINANCING – INCREASING RECEIVABLES LTV – TRADE CREDIT-INSURED FINANCE|
|STANDALONE – SELF–INSURED RISK ONLY – CASH COLLATERAL SUBSTITUTE – WDG which is defined|
Examples of Applications of LLR to Enhance Insurance and Financal Transactions
Significant opportunities to reduce the sunk cost of insurance and cash flow volatility, reducing companies WACC.
- Reducing borrowers need to post cash collateral where trade credit insurance is a funding requirement.
- Supporting increased advance rates on funding secured by trade receivables; we are already discussing the use of LLR by lenders as a means of supporting increased LTV.
- Enabling property (fire and natural catastrophe) B.I. (Waiting periods, denial of access) deductibles to be funded and reducing “or – in” financing costs on these covers.
- Building cash provisions for statutory contingent liabilities, for example: airline compensation or telecommunications company liability to consumers for insurable service interruption.
- Enabling solutions to risks particular to specific sectors to be financed and transferred, e.g. where only equity stands between reputational risk and loss absorbtion e.g. food, electrical goods & motor vehicles and product recall.
- Supporting financing transactions on energy projects where terms require significant risk retention, for example filling liquidity gap on project finance waiting periods for power generation units of 30+ days.
- Substituting cash held back by merchant acquirers on forward credit card airline ticket sales. Product enables airlines to receive cash earlier in the payment cycle at a cost of 8.9BPS per online ticket sale, adding value to sponsor, a processor of online transactions for most global airlines.
- Substituting a letter of credit to capitalise a captive insurance vehicle.
For further information please kindly contact:
A mutual is a company owned and controlled by its members
The type of mutual that we create and manage is an organisation that provides an alternative to conventional insurance cover for its Members.
Its sole purpose is to provide benefits for its members and to meet their needs in terms of price, service and the risks covered.
Typically, a mutual is formed for an organisation whose members share a high degree of similarity in their risk profiles. As a group, these members are able to achieve benefits that they could not obtain individually.
A mutual can provide an attractive alternative to conventional insurance products and services.
Benefits of a Mutual
- Control is vested in a Board of Directors elected from the membership; hence the members control the mutual to ensure that it operates to their benefit and is always member-focussed
- Members can expect sympathetic handling of claims
- In a mutual all surpluses (profits) belong to the members and these surpluses are not subject to corporation tax (based on the current tax regime).
- Protection and service is tailored to members’ specific needs based on the sector they operate in
- Contributions (premiums) are based on actual claims experience
- There are no third party shareholders
- Capital efficiency
- Insurance premium cycle flattened
- Mutuals are not subject to Insurance Taxes
- Complete transparency through ownership and control
- Mutuals offer members the highest quality service at a competitive price
- Mutuals are selective in offering membership to groups sharing similar risk profiles with generally good risk management controls and practices
- Mutuals provide members with cost effective protection solutions that meet their specific needs whilst combining to secure long-term member benefits and member loyalty
For Single Company Mutuals additional benefits of:
- Balance sheet flexibility
- On shore management
- Capital efficiencies