LEX LIQUIDITY RESERVE

WHY 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? 
  1. 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.
  2. 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.
  3. An insurer covers the timing risk in return for a small premium and charge a competitive rate on funds claimed.
  4. All cash in the bank remains the asset of the company’s during the term.
  5. 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.
NEXT STEPS

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.

  1. Lex Risk Solutions would be pleased to review your current insurance policies, risk gaps and retained risks
  2. 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
  3. LRS will recommend an insurance structure that enables a company to fund these risk retentions, close risk gaps and reduce their sunk insurance cost.
  4. Solutions can be structured for an individual entity or portfolios of risks where risk characteristics are shared by separate legal entities.
  5. 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
PRIVATE SECTOR

Significant opportunities to reduce the sunk cost of insurance and cash flow volatility, reducing companies WACC.

  1. Reducing borrowers need to post cash collateral where trade credit insurance is a funding requirement.
  2. 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.
  3. 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.
  4. Building cash provisions for statutory contingent liabilities, for example: airline compensation or telecommunications company liability to consumers for insurable service interruption.
  5. 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.
  6. 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.
  7. 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.
  8. Substituting a letter of credit to capitalise a captive insurance vehicle.

For further information please kindly contact

David McKibbin   dmck@lexrisks.com ,  Mobile:  +44 7972 178759

or Richard Henry rmh@lexrisks.com , Mobile:  +44 7582 342698