Letter of Credit

A legal commitment issued by a bank or other entity stating that, upon receipt of certain documents, the bank will pay against drafts meeting the terms of the letter of credit. Letters of credit are frequently used for risk financing purposes to collateralize monies owed by an insured under various cash flow programs such as incurred but not paid losses in a paid loss retrospective rating program. “LOCs” also provide a means of meeting capitalization requirements of captives, and are used to satisfy the security requirements in “fronted” deductible or retention programs.