Creativity Rises With Fronting Costs

By Caroline McDonald

A survey has found that captive insurers are shouldering asurprising level of fronting fees and that the ranking of frontingfirms doing the most business has shifted.

The survey was conducted online for the first time byMinneapolis-based Captive Insurance Companies Association, inconjunction with the Vermont Captive Insurance Association, locatedin Burlington, Vt.

Michael Mead, chairman of the CICA Fronting Survey and presidentof M.R. Mead & Co. in Chicago, said although some of the surveyresults were “expected,” the most significant finding was the“shift in the batting order with frontingthose [companies] that areavailable.”

Mr. Mead said Discover Re was named as a fronting company usedby many more people this year than last, making its way into thetop five. “Kemper, while it was named, is out of the picture,” hesaid. According to the survey, Lexington remains the most frequentchoice. Zurich, tied for fourth place with Discover Re, is beingused less as a front, Mr. Mead said.

Zurich North America spokesman Keith Owens told NationalUnderwriter, “We continue to have a significant number ofsingle parent and group captives, and we evaluate theseopportunities as we do all of our businessthose who offer us a goodcommercial opportunity.”

Mr. Mead noted that there was “a subtle shift” in some of thesurvey questions this year that revealed that some captives are nolonger using fronts.

He explained that organizations writing a particular piece ofbusiness in their captivessuch as propertywho have generalliability insurance and own their building “don't necessarily haveto show anybody a certificate of insurance. We're seeing peoplewho, rather than go through all the difficulty of lining up afront, say 'Who needs it?'”

In some instances, he added, medical groups, particularlydoctors, approach the hospitals they serve “and say 'We're forminga captive, but we can't get a front. Is that a problem?'” In somesituations the hospital does not have a problem, he said, “becausethe hospital has a captive, knows how they work, and is onlyconcerned with [the doctor's] medical professional abilities.”

“So some people are finding creative ways to get aroundfronting,” he surmised.

The survey found that fronting costs are rising as much as 20percent for some captive owners. Fronting fees, according to CICA,remain at less than 10 percent of annual premiums for more than 56percent of respondents, but five percent reported costs in excessof 20 percent.

Mr. Mead explained that fronting costs cover services includingthat of lowering credit risk, which means “allowing an insurer toissue a certificate with [its] good name and credit on it. That isimportant, but what is it worth? That is always the argument.”

Another service offered by fronting companies, which Mr. Meadsaid is less known but “more compelling,” is the fact that they“run interference with the regulators.”

“This is a service that is not emphasized enough because this isa very hard job. It takes a lot of time and a lot of skilledresources.”

“With 50 sets of regulations, it can be pretty difficult on alarge account that has, say, a trucking company that is goingthrough several different states, or property owners in differentstates. You can get into some small, nagging issues that take a lotof time or staff to answer questions and reformulate data.”

How will captives handle rising fronting costs? “As [costs] riseabove 15 percent, the deal ceases to become as economical,” Mr.Mead said. “I don't think they will shut down their captives. Ithink they'll get creative, like some of the ones we're talkingabout.”

In terms of price and value, most respondents viewed pricing asbeing reasonable and value as being moderate. In fact, 65.2 percentof respondents reported that the price of fronting fees wasreasonable, while only 23.9 percent viewed them as expensiveanupward trend, from 13 percent in 2000, to 22 percent last year.

On the other end of the scale, the survey found that those whoview the pricing as inexpensive dropped from 25 percent in 2000 to10.9 percent last year.

The response rate to this year's survey, according to CICA, was30 percent of the CICA and VCIA memberships compared with lastyear's 34 percent. As in prior years, more than 70 percent ofrespondents are single parent captives.

Risk retention groups made up 9 percent of respondents andsponsored captives were 6 percentdouble last year's number.

Reproduced from National Underwriter Edition, May 19, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.