Captives Cite Troubles With TheirFronts

The number of insurers willing to serve as a front for captives isdown, while the quality of fronting services is deteriorating andcosts are rising for no additional value, an industry studyfound.

That is the grim picture for risk managers that emerged in ajoint survey by the Minneapolis-based Captive Insurance CompaniesAssociation and the Vermont Captive Insurance Association,entitled: “The CICA 2002 Fronting/Risk-Sharing Survey.” The reportfollows up on last year's inaugural survey.

This year, 270 captive companies that are members of CICA and orVCIA were polled. These are mature entities, with the average ageof the responding captives at 11.8 years, according to CICA.

The survey revealed three key trends for risk managers who formcaptives to self-insure some of their exposures, but who needlicensed, primary carriers to write the initial policy to satisfystate regulatory requirements, before reinsuring the exposure withthe buyer's captive, according to Brian Donovan, a member of theVCIA board and chairman of CICA's ad-hoc fronting committee.

“The cost of fronting has increased an average of 9 percent, andcaptives' perception of the importance of fronting is still veryhigh,” he said, adding that the cost-benefit relationship betweenthe captive and its fronting insurer is “becoming unbalanced.”

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 noted. “The costs theyare paying for the services now are viewed as excessive in light ofthe benefits 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 and arebringing new exposures into their fronting/risk-sharingprograms.

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 survey found, whether the increase was theresult of higher written premiums by the captive, fee increases, ora combination of the two.

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.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, June 17, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.