Fronting arrangements in captive insurance, explained
A fronting arrangement is one in which a licensed insurer, called the fronting carrier, issues an insurance policy and then reinsures some or all of the risk to a captive or another reinsurer. The policyholder deals with the fronting carrier, while most of the economic risk sits with the captive. Fronting is used when a policy has to come from an insurer licensed in the relevant state, or one a contract counterparty will accept, which a captive may not be.
Who does what
| Party | Role |
|---|---|
| Insured (the captive’s owner or its operating companies) | Buys the policy and pays premium to the fronting carrier |
| Fronting carrier | Issues the policy, remains liable to the insured, cedes risk to the captive and usually charges a fee |
| Captive | Reinsures the ceded risk and pays the fronting carrier its share of claims |
| Other reinsurers | May take risk above the captive’s layer |
This table is conceptual; the actual contract chain varies by transaction.
Issuing the policy versus carrying the risk
The fronting carrier's name is on the policy, and it owes claims to the insured even if the captive later fails to pay its share. That makes fronting a credit decision for the carrier. The captive's obligation runs to the fronting carrier under a reinsurance agreement, not to the insured. How much risk the carrier keeps, if any, is set by contract.
Collateral, counterparty and claims
Because the fronting carrier stays liable, it usually requires security from the captive. State credit-for-reinsurance rules, modeled on the NAIC Credit for Reinsurance Model Law, let a ceding insurer take credit for reinsurance from an assuming insurer that is licensed, accredited or otherwise qualified, or that provides security such as cash, securities, a clean irrevocable letter of credit or a trust. A captive that does not meet those criteria typically provides such security. Claims may be handled by the fronting carrier, a third-party administrator or another provider, as the agreements set out; agree data access and reporting in writing.
Questions to settle before signing
- What fee will the fronting carrier charge, and what does it cover?
- What collateral is required, in what form, and how is it adjusted over time?
- Who controls claims handling and settlement authority?
- What data and reports will the captive receive, and how often?
- What happens on termination, including run-off of open claims?
- Which state rules and policy forms apply to the issued policies?
These are questions for counsel familiar with reinsurance and an actuary who can model the collateral and loss assumptions.
Related reading
For a short definition, see fronting carrier. To evaluate programs in which a captive assumes risk from an issuing insurer, see captive reinsurance programs. For the wider picture, read what is a captive insurance company.
Educational information only; not insurance, legal, tax, actuarial or regulatory advice.