The Fronting Wars continue

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A fronting company is a licensed insurance company that issues an insurance policy and reinsures the risk of loss back to the captive insurer owned by the insured. This allows the insured to benefit from both having a captive insurer and being able to obey regulations that mandate the insurance company that is issuing the policy to be licensed. Furthermore, this licensed insurance company allows the insured to work with other parties that require their insurance company to be rated, whereas this would not be the case in a pure captive situation. However, the market for providing fronting services is becoming dramatically smaller and insurance companies are becoming more tentative to enter into these agreements.

Despite the fact that the use of captives as a risk financing technique is growing at a rapid pace, insurance companies do not seem to have the financial and underwriting resources to provide fronting services. This could possibly be due to the fact that there are fewer insurance companies in the market compared to the past and they have an unwillingness to take on a fronting position while seeing other companies fail, like Frontier and Legion. Despite these "notorious demises," the author argues that insurance companies could make a profit from fronting if they become better secure and paid more attention to the finer details of the reinsurance agreement.

The author forms a very good point that an important consideration an insurance company must make when entering into a fronting situation is to look at the nature of risk of the potential insured and the character, capacity, and capital of the captive owner. Furthermore, to better protect against having to pay for losses because the captive is unable to do so, the insurance company should increase their requirement for liquid cash and cash equivalents as necessary obligations in order to create the policy. On the other side of the picture, insurance companies should also evaluate the motives a company has for forming a captive to make sure that they are doing it for the right reason and that the managers understand how the cash will be handled.

Overall, an insurance company could make money by acting as a fronting company if they took the proper precautions before entering into an agreement. They should not shy away from this opportunity because some companies have failed in the past, but rather look for ways to improve upon their wrongdoings. Basically, if security and management are acceptable and watched then solvency issues can be mitigated, if not eliminated.

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