A front-end policy is a risk management technique in which an insurer takes out a policy to cover a specific risk, but then assigns the risk to a reinsurer. Fronting policies, which are a type of alternative risk transfer (ART), are most often used by large organizations. Since the reinsurer assumes the entire risk of the policy, this retains full control over the claims process. Fronting is really a special form of reinsurance. A front-end insurance company is licensed in the State where the captive presents a risk. The captive enters into contracts with the front insurance company, which issues a paper insurance policy that includes the letterhead of the front company. Then, both parties sign a frontal agreement that transfers the risk to the prisoner. Ultimately, the captive receives an insurance policy from the front-end company, and the risk lies with the captive. Let`s start with this fundamental question. Essentially, front-end insurance is a term that describes a relationship between two companies: one is a licensed provider of commercial insurance and the other is an independent captive or organization that cannot purchase insurance coverage. The captive, who is neither licensed, uses the front-end company to issue a compliant insurance policy that the captive would otherwise not be able to provide due to his lack of a licence. The company that subscribes to the initial policy is the front-end company and receives part of the premium, although all the risk is transferred to the reinsurer. Since the difficult market days of 2001, captive insurance companies have struggled to implement or maintain favorable front-end agreements.

Some front-end carriers have left the market, so existing captives need to find new front-end relationships. This has significantly reduced the number of front-line carriers available to prisoners. Other front-end carriers are more selective, making it harder for company-owned insurance companies to find a front-end company. Finally, the fees charged by the other front-end carriers increased by several points, reducing the margins of the company-owned insurance companies that bear the risk. The difficulties faced by captive insurance companies in finding suitable front-end carriers at profitable rates are one of the biggest challenges facing the captive insurance industry today. The insurance world is known for all sorts of complex and confusing terminologies used to describe different relationships – switching, excess risk insurance, retrocession and dozens of others. The concept of front-end insurance is one of those confusing ideas for most people, and for good reason. It`s not something you hear about every day, even if it happens in the background in companies of all sizes, including some of the largest in the world.

On this page you will find some of the basics of front-end arrangements so that you can better understand them. The fronting company will almost always need collateral to guarantee the captive`s obligations to the fronting company under the fronting agreement. The guarantee comes in one of three forms: captive funds, which are held by the front company, a trust agreement financed by captive investment securities or a letter of credit issued by a bank on behalf of the captive (usually secured by captive investment securities). Regulatory considerations. In any decision made, insurers who choose fronting as their business model should take into account the regulations of their country of residence. There is no place in this article to discuss the many government regulations, but be aware that some regulators will be more supportive of these types of agreements, while others may make such agreements unaffordable. For example, the California Code of Regulations (CCR para 2303.15) imposes a restriction on a front-end carrier to retain 10% of the risk. Fronting is a reinsurance agreement. The front-end carrier is the insurance company on whose paper the insurance policy is issued. The reinsurer assumes all or almost all of the risk taken out with the front-end carrier for a fee at the front. Fronting has become a common practice in the insurance securities (ILS) market, where investors and ILS funds work with front-end insurers to more effectively access risk, benefit from front-end vendor ratings, while often leveraging front-end providers` ability to hold the tail risk associated with the transaction. To mitigate this risk, the front-line insurer should assess the financial health of its reinsurer/partner.

Fronting agreements always require a guarantee to guarantee the reinsurer`s obligations under the fronting agreement. The most common types of coverages are: However, if the captive or self-insured person does not provide compensation (e.B. becomes insolvent due to a massive loss), the front-end company must comply with the policy. As a result, the façade company assumes the risk and charges a fee for this service. Fees are usually paid as a percentage of the premium. Risks for the front-line insurer. Like the front-end insurer, a healthy business partner is essential. .