The Role of a Fronting Company

1. The Need for a Fronting Company

As insurance policies are subject to individual state regulation, which requires insurance companies in each state to be licensed (or admitted), companies using captives normally require a licensed insurer to stand in front of the captive. In these cases the insurer will act as the company issuing the policies and the captive assumes the role of reinsurer, this is known as a fronting arrangement. Other reasons for using a front company include

(i) Rating

Many banks require insurance to be with an insurer with a minimum financial size.

(ii) Multi-State exposures

Companies operating in a number of states may find it more efficient to work with an insurer that is already licensed in each one.

(iii) Tax Considerations

There may be an advantage to the insured if they are premiums paid to an insurance company as opposed to a captive are tax deductible.

2. The Fronting Fee

Negotiating terms with a fronting company is often key to the success of a captive program. As a fronting company is responsible for any failure by a captive or its reinsurers to pay losses (or for any complaint by policyholders), the captive needs to be persuaded that its partners are both financially strong and professional. In return for assuming these liabilitiesas well as the work generated in terms of filing returns, auditing and for the use of the capital, a fronting fee is charged. Typical fronting fees can vary from between 4% and 10% depending on the company and the class of business.