NU Exclusive: CICA Fronting Report

By Caroline McDonald

NU Online News Service, June 6, 4:19 p.m.EST?Many captive insurers still view fronting services assomewhat valuable, but they find that the number of providers andquality of service is down, while costs are up, an industry studyhas found.

That picture emerged in a joint survey by the Minneapolis-basedCaptive Insurance Companies Association and the Vermont CaptivesInsurance Association, titled: "The CICA 2002 Fronting-Risk SharingSurvey." The report follows up on last year's inaugural survey.

This year, 270 captive companies that are members of CICA and orVCIA were polled. The average age of the responding captives is11.8 years, according to CICA.

"There are three issues," said Brian Donovan, a member of theVCIA board and chairman of CICA's ad-hoc fronting committee. "Thecost of fronting has increased an average of 9 percent andcaptives' perception of the importance of fronting is still veryhigh." The cost-benefit relationship, however, is "becomingunbalanced," he said.

Mr. Donovan, chief executive officer of Steel Tank InsuranceCompany in Chicago, said that those surveyed previously saw theirfronting fees as a "great value." They now say "it's of moderatevalue or the services are overpriced," he said. "The costs they arepaying for the services now are viewed as excessive in light of thebenefits they receive from fronting."

Despite all this, he said, "captives are bringing more lines ofcoverage" into their fronted programs.

"So you have this, 'Gee, it's getting more expensive. We don'tthink we're getting the value that we used to get, but we stillthink enough of having a fronted program that we will bring induring these tight times, we're going to have you front more linesof coverage for us.'"

One trend Mr. Donovan said he found "troubling" is an increasedconcentration of the top five fronting carriers. "Two carriers--ACEand AIG--have about 40 percent of the market," he explained.

Key conclusions drawn by the survey by CICA and VCIAinclude:

? While fronting/risk-sharing continues to be viewed as veryimportant to the viability of many captives, this service is nowmore expensive.

? The fronting/risk sharing providers have become moreconcentrated, reducing the number of viable options available tocaptive insurers.

? Existing captives are expanding their lines of coverage andbringing new coverages into their fronting/risk-sharingprogram.

The survey found that while fronting and risk sharing feescontinue to represent, on average, less than 10 percent of acaptive's premiums, the average fronting/risk sharing fee paid bythe captive to the fronting carrier increased 9.3 percent to$740,000 in 2002 from $677,000 in 2001. It is unclear, the surveyfound, whether the increase was the result of higher writtenpremiums by the captive, fee increases, or a combination of thetwo.

In 2001, according to CICA, 58 percent of survey respondentsfound their fronting-risk sharing services to be an "excellentvalue." In 2002, however, only 37 percent rated their services asexcellent.