Captives Conference: Fronting fraught with pitfalls, but also pluses

Fronting a captive is a challenging business, but one which also has the potential to provide great benefits to the fronting insurer, delegates to the Strategy Institute’s “Captive Insurance Strategies” conference in Toronto heard Wednesday.
Robert Davis, senior vice president for ACE Captive Solutions says many fronting arrangements are established on the basis of need. For example, U.S. workers’ compensation coverage written through a captive must be fronted by a local, admitted insurer. And other financial agreements such as mortgages may require insurance to be provided by an admitted carrier.
But for some insurers, there has been a negative perception of fronting a captive. The thinking, Davis says, is “they’re taking business away from the traditional marketplace, why should I aid and abet taking money from my own pockets?” But this view is diminishing as captives become more accepted. “They are becoming just as traditional as traditional insurance.”
For insurers, captives can boost gross premiums and provide top-line growth. They are also a way of enhancing relationships with commercial clients. “Most of the Fortune 1000 companies have one captive or another”, he notes, which adds to the prestige factor of acting as a fronting carrier for such firms.
But there are also perils fronting companies need to be aware of, he adds. This includes the effect of gross premium growth on the “net to gross” ratio, and the resulting boost to reinsurance recoverables, particularly in the current environment where financial analysts and rating agencies have a keen eye on recoverable levels.
Also, fronting companies need to be very careful when dealing with group programs with softening rates, many of the good risks in a group may be tempted back to the traditional market, and their withdrawal could leave the fronting carrier with a program filled with less-than-stellar risks.