Fronting not as popular amongst captives, study suggests

A new study shows that “fronting” arrangements are becoming less attractive, and less available, for captives. The 2002 survey by the Captive Insurers Companies Association (CICA) and the Vermont Captive Insurance Association (VCIA) shows that a growing number of captives are avoiding fronting arrangements due to cost concerns, amongst other reasons.Fronting is a process whereby an admitted insurer allows its good credit rating to be used by a captive in issuing certificates of insurance in order to meet regulatory and lender requirements. Fronting fees are generally targeted at less than 10% of the annual premiums, and should be an easy transaction for the fronting company.However, with so many insurers hurting financially, the risk of fronting is now seen as a real one, and survey respondents suggest availability is an issue, as is price. More than half of respondents reported an increase in fronting fees last year.While the majority of captives saw fronting fees as reasonable, and less than 24% thought them expensive, this is still an increase from 2000 when only 13% saw fees as expensive. The number who categorized fronting fees as inexpensive dropped to 10.9% in 2002 from 25% in 2000. Similarly, those who felt they received excellent value from their fronting arrangement declined to 26% last year from 37% a year prior.In all, captives rated the importance of fronting as just 2.4 on a scale of 1 to 5. They also saw fronting carrier procedures as being more strict than in previous years.”It appears from the responses that some captives are able to operate without a front, and the trend is growing,” states a CICA press release. The CICA speculates that the relative maturity of some captives may put them in a better position to self-finance. Another note of interest is the shifting line-up of players in the fronting market, with Kemper and ARTIS both having exited the market since the survey was completed. It remains to be seen what impact these departures, accounting for more than 5% of the market, will have on this year’s trends.