Contingent capital mechanism
by which a US insurance company
may ensure availability
in case it suffers a catastrophic loss
. In this arrangement
, the insurance company establishes a trust
that sells its own promissory notes
(called CSN trust notes, which pay above-market interest rates) to investors and places the sales-proceeds in liquid securities
such as Treasury bonds. When the insurance company requires funds
, it issues its promissory notes (called surplus
notes, which are used for redeeming CSN trust notes upon their maturity) to the trust in exchange
for the securities and converts them to cash.
Surplus notes (like loans) increase the insurance company's assets but (unlike loans) do not increase its liabilities because (under US accounting
rules) they are regarded as policyholders' surplus.