Podcast Explores Custody, Collateral, and Regulatory Changes in Captive Insurance

In this podcast, Joel Appelbaum interviews Marty Ellis, the leader of Comerica Bank's global and captive insurance group, about custody, collateral, and regulatory changes in the captive insurance industry. Marty explains the fundamentals of custody accounts for captive insurers, emphasizing their importance in holding financial assets such as US government securities and corporate bonds to pay claims when necessary.

Marty delves into the responsibilities of custodians, who manage investments, track securities, settle trades, and handle regulatory reporting. He also explains the differences between letters of credit and reinsurance trusts as collateral options for captives. Letters of credit are preferred due to their flexibility in investments and ease of amendment despite being more expensive. In contrast, reinsurance trusts, governed by New York Regulation 114, are cheaper but come with investment restrictions and are more complex to manage.

The conversation shifts to recent industry concerns, such as the Vesttoo scandal, which involved fraudulent letters of credit amounting to $4 billion. This incident has heightened scrutiny in the industry, leading to calls for more secure methods of issuing letters of credit, like the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system, to reduce the risk of fraud. Marty advises captives and commercial insurers to be vigilant in monitoring their collateral options, ensuring they choose reliable banks and confirming the validity of letters of credit regularly.