They say necessity is the mother of invention, so when GMAC Insurance Group was downgraded to "A-minus" from "A" by A.M. Best Company back in May 2005, the timing was perfect to introduce a new segregated trust to reassure buyers their accounts were secure.
However, GMAC Re's chief operating officer, Karen Schmitt, made it clear in a recent interview with National Underwriter that her company's trust product was not created in response to the downgrade, but "was actually in the pipeline well before then. We felt it would be a good marketing tool in any case."
"There was a lot of fear out there when we spoke to clients," she said, referring to primary insurers and captive owners looking for rock-solid reinsurance. "The trust initiative wasn't just a rating issue. Your rating could be good today, but you could be gone in two or five years."
The downgrade, according to a release by Best, did not result from any concerns about the GMAC reinsurance entities themselves, but instead "reflect[ed] the weakened financial condition of the ultimate parent company, General Motors Corp., driven by longstanding competitive pressures that are increasingly impinging on its financial performance."
Best cited "the potential burden on the insurance operating subsidiaries to support GM," along with an additional concern that "a portion of GMAC's business–extended warranty and nonstandard automobile insurance–remains exposed to downturns in economic conditions."
Thus, having a segregated trust option to roll out right after the rating downgrade helped reassure brokers and buyers alike about the security of doing business with GMAC Re, according to Ms. Schmitt. "It almost made the rating downgrade a non-issue. It was an easier sell," she said.
In short, GMAC Re offers to set up a voluntary, segregated trust for each treaty reinsurance client–including primary insurers and at least two high-end captives–to "provide the best security in the market, reduce risk for our clients and create peace of mind," the company said.
There are 59 such trusts in place with a funded balance of approximately $497 million, noted GMAC Re. The Mt. Laurel, N.J.-based firm is a wholly owned managing general agency for Motors Insurance Corp., placing business exclusively with its parent via independent brokers or directly with primary insurers.
In explaining how the trust works, GMAC Re said that:
o Once a client pays its reinsurance premium, the associated liabilities (unearned premium, loss reserves and incurred but not reported losses) are placed into the trust, and are not commingled with the funds from any other ceding company.
o Claims are paid in the normal manner (not drawn from the trust), and the trust balances are reviewed and adjusted at least semi-annually.
o There is complete transparency, as each ceding company receives an analysis of the needed liabilities, with the opportunity to dispute those balances if they disagree.
"The advantage to buyers," according to GMAC Re, "is that it reassures them that the amounts needed to fully exhaust their ultimate liabilities are funded and are isolated from all other liabilities of the company. The trust is noncancellable by GMAC Re."
GMAC Re added that "if payments are late on an undisputed balance, there are provisions for drawing the claim out of the trust. This structure provides 'peace of mind' that the insurance funds can't be tapped for other uses, such as to cover shortcomings in investments or funding needs elsewhere in the organization."
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