The company does. It chooses a contract value - which may equate to its Boards risk appetite - and agrees to pay fixed monthly payments plus a small premium to cover against their default into a blocked bank account in their name. If the payments are made to an onshore bank account, they are not a cost, but an application of the business’ own funds. If a captive insurance vehicle is used these payments may qualify as operating costs.
Why would the insured entity want to buy this product?
It immediately funds a predetermined level of risk an insured/obligor or your counterparty (insurer/funder) may require you to retain in a situation where risk is transferred to that counter-party. The beauty is, however, that whilst the retention is fully available from day 1, the insured/obligor has the time to fund this retention over an extended term. The full reserve is immediately available, long before the reserve has been fully funded. The insurer assumes the timing risk of claims on the reserve exceeding the funds that have accumulated at the point a contingent event occurs. It therefore offers treasurers a tool that not ensures they don't have to find the cash to fund these retained contingent obligations when a loss crystallizes, an XS Reserve may also be able to substitute cash or a standby LC.
What happens to the money if there isn’t a claim?
After contract run-off, 100% of any remaining sums that have accumulated after claims have been paid are released for the insured entity to use as they choose. Until then, insurers (and funders to whom the XS Reserve may be assigned as collateral) hold a full security interest over the monies, ensuring monies cannot be misused.
What happens in the event of a claim?
Insurers will promptly settle claims up to the full contract value. If a funder is assigned the benefits, the insurer becomes the funders counter-party in the event of a claim. However, the insured company is contractually obliged to complete all payments during the period, even if there is a total loss on day one.
How can XS Reserve assist borrowers?
XS Reserve helps improve all-in financing costs particularly if the assets insured (such as trade receivables) support the borrowing base or financing is secured upon them. An XS Reserve can reduce both liquidity risk and dependence on other forms of more expensive contingent liquidity. Funding is cheaper because any asset unfunded (advance rates may be often 60-70% of a trade receivables portfolio) is funded by a company's own equity. This equity is not free and demands a return.
How much does XS Reserve cost and minimum value?
It is priced very competitively when compared to other forms of contingent liquidity. Its price should also be compared with the opportunity cost of cash tied up as collateral in a funding arrangement that could be far better employed supporting the company's growth. The minimum value depends on the creditworthiness of the insured company, but is likely to be £100,000.