contingent surplus note (CSN)

Contingent capital mechanism by which a US insurance company may ensure availability of cash 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.