Identifying a Fronting Carrier
As a fronting company, being the licensed and regulated insurer, is ultimately responsible for any problems that may arise it will normally need to approve all aspects of a captive program, not least the financial strength of the reinsurers. For this reason the front company should be identified as early as possible so a working relationship to approve all aspects of the program can be established. In selecting a fronting carrier the following issues need to be addressed:
3.1. Does the Fronting Company have the required Licensing?
The company must be licensed in all the states that the business will be insured in.
3.2. Is it Financially Stable?
It is important to be confident that a fronting company will be able to meet its future obligations to policyholders, or more simply put that it will be able to pay future losses. A company's A.M. Best rating is the generally accepted means of determining a company's financial solvency. Two rating opinions are given, one general rating ranging from A++ (Superior) to F (in liquidation) and one for financial size ranging from 9 (very strong) to 1 (poor). Generally a company with any form of A rating is preferable along with B++ and B+ which are deemed "very good" as opposed to A++ and A+ which are deemed "superior" and A and A- which are deemed "excellent". Companies with B and B- ratings are deemed "fair" and C++ and C+ are deemed marginal.
3.3. What are its Capitalization Requirements?
Since the fronting company is at risk in the event that reinsurers are unable to pay, it will want to be assured that all reinsurers are financially sound. As the captive insurance company is in effect a reinsurer, the fronting company will need to be convinced that the captive will be able to fulfil its obligations. Part of this process may require the fronting company to approve any reinsurance protections that protect the captive. In certain circumstances the fronting company may require that it withholds premiums until claims are paid, that collateral is provided by the captive or that the captive is set up as a trust with the fronting company as the beneficiary.
3.4. What are its Reinsurance Requirements
In the same way that a captive should be concerned with the financial security of a front company the front company will normally have requirements relating to the financial size or rating of any reinsurers involved with the captive program. In addition some front companies may also have existing reinsurance programs in place, especially for catastrophic risks, known as "whole account covers". A fronting company may therefore require less reinsurance to be purchased by the captive or allow the captive to access that coverage in both cases saving the captive cost.
3.5. Will it be easy to work with?
As with any business relationship the more responsive and approachable a front company is, the more efficiently the captive program will operate.
3.6. Will it retain any risk?
Reinsurers often look to a fronting company to retain around 10.00% to demonstrate a commitment as well as to give it a vested interest in the profitability of the program.
