Fronting is most often understood as when a transferor company (insurance company) underwrites a policy and transfers all risk to a reinsurer. The main company will require the captive insurance company to reimburse all costs related to the advance policies it issues, plus the payment of a fee. The transferred costs typically include fees, premium taxes, the costs of participating in the guarantee fund, and sometimes the costs of managing and underwriting claims. Costs and charges can be as low as 6% or as high as 30% of the gross premiums paid by the insured.
As the role of the main carrier varies, so does the percentage of premium required by the participant from the main company. The reinsurer links its product to the main insurer, so that there is a concentration of risk and there may be no alternative shell insurers. In its most common form, a commercial insurance company (“parent company”), authorized in the state in which the risk to be insured is located, issues its policy to the insured. The leverage granted to the main insurer or the health problems of a major insurer can have a negative impact on the business.
The difficulties that captive insurance companies have had in finding suitable first-line insurance companies at cost-effective rates are one of the biggest challenges facing the captive insurance industry today. By using a shell company, the insured may be in a better position to deduct premium payments from insurance contracted through the parent company and, ultimately, through the captive one. Fronting has been defined as the use of an authorized and authorized insurer to issue an insurance policy on behalf of a self-insured organization or a captive insurer without the intention of transferring any risk. The presentation relates to the use of an authorized and authorized insurer to issue an insurance policy on behalf of a self-insured organization or a captive insurer without the intention of transferring any of the risks.
The insured receives a policy from the parent company, but the risk covered by the program ultimately falls on the captive insurance company. Fronting can be defined as an alternative way of entering markets and increasing premiums, a valid tool that can be used both for the benefit of an insurer that needs the front and of an insurer that is willing to be the first to obtain adequate compensation.