Fronting Arrangement FAQs
The insurance world is known for all sorts of complex and confusing terminology used to describe different relationships—commutation, per excess risk insurance, retrocession and dozens more. The concept of fronting insurance is, for most people, one of those confusing ideas, and for good reason. It’s not something you hear about every day, even though it’s happening in the background at companies of all sizes, including some of the world’s biggest. This page lays out a few of the basics about fronting arrangements so you can better understand them.
What Is Fronting?
Let’s start with this foundational question. Essentially, fronting insurance is a term that describes a relationship between two entities: one is an admitted carrier of commercial insurance and the other is an unrelated captive or organization that cannot write insurance coverage. The captive, which is unlicensed and unadmitted, uses the fronting company to issue a compliant insurance policy, which the captive could otherwise not provide due to its lack of licensing.
The main purpose of fronting insurance is to allow the captive or organization to issue policies in states in which it is not licensed. The other purposes are to comply with insurance regulations, and give the captive access to other services, such as claims handling and excess risk transfer capability, in a cost-effective way.
How Does a Fronting Arrangement Work?
A non-admitted insurer (a captive or self-insured) contracts with a licensed, admitted insurer (like Benchmark) to issue an insurance policy that satisfies regulatory and/or certification requirements. The risk of loss remains with the captive or self-insured by way of an indemnity agreement.
If the captive or self-insured fails to provide indemnity (e.g. goes insolvent because of a massive loss), however, then the fronting company must fulfill the policy. As a result, the fronting company takes on the risk and charges a fee for this service. The fee is usually paid as a percent of the premium.
Fronting is really a special form of reinsurance. A fronting insurance company is licensed in the state where the captive has a risk. The captive contracts with the fronting insurance company, which issues an insurance policy on paper that features the fronting company’s letterhead. Then, the two parties sign a fronting agreement which transfers the risk back to the captive. In the end, the captive receives an insurance policy from the fronting company, and the risk resides with the captive.
What Is a Captive Insurer?
The history of captives is long and complicated, but it boils down to this: captives are insurance companies created by, and wholly owned and controlled by, its own insureds. Put another way, a captive is an insurance company formed solely to meet the needs of its parent organization.
Captives are unlicensed and non-admitted, except in the place it was created (domicile). Because of this, captives usually cannot write insurance policies anywhere but their domiciliary state and must partner with a licensed/admitted commercial insurer to issue policies elsewhere.
Why Do Captives Use Fronting Arrangements?
Most states require companies to provide evidence that they are covered by an admitted insurer for things like workers’ compensation insurance and auto liability. By using a fronting company, the captive can avoid having to obtain licenses in every state in which it would like to provide insurance because the fronting company has the required licenses.
Get Even More Answers to Your Fronting Arrangement Questions
Insurance fronting can be complicated. The good news is, you don’t have to decipher everything on your own. Benchmark’s experts have decades of experience and can walk you through the whole process. To speak with one of our team members, call 800-283-0622 or contact us online today.