Captives Cite Troubles With Their Fronts

The number of insurers willing to serve as a front for captives is down, while the quality of fronting services is deteriorating and costs are rising for no additional value, an industry study found.

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

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

The survey revealed three key trends for risk managers who form captives to self-insure some of their exposures, but who need licensed, primary carriers to write the initial policy to satisfy state regulatory requirements, before reinsuring the exposure with the buyer's captive, according to Brian Donovan, a member of the VCIA board and chairman of CICA's ad-hoc fronting committee.

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

Mr. Donovan, chief executive officer of Steel Tank Insurance Company in Chicago, said that those surveyed previously saw their fronting fees as a “great value.” They now say “it's of moderate value or the services are overpriced,” he noted. “The costs they are paying for the services now are viewed as excessive in light of the benefits they receive from fronting.”

Despite all this, he said, “captives are bringing more lines of coverage” into their fronted programs.

“So you have this, 'Gee, it's getting more expensive. We don't think we're getting the value that we used to get, but we still think enough of having a fronted program that we will bring in during these tight times, we're going to have you front more lines of coverage for us.'”

One trend Mr. Donovan said he found “troubling” is an increased concentration of the top five fronting carriers. “Two carriers–ACE and AIG–have about 40 percent of the market,” he explained.

Key conclusions drawn by the survey by CICA and VCIA include:

While fronting/risk-sharing continues to be viewed as very important to the viability of many captives, this service is now more expensive.

The fronting/risk-sharing providers have become more concentrated, reducing the number of viable options available to captive insurers.

Existing captives are expanding their lines of coverage and are bringing new exposures into their fronting/risk-sharing programs.

The survey found that while fronting and risk-sharing fees continue to represent, on average, less than 10 percent of a captive's premiums, the average fronting/risk-sharing fee paid by the 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 the result of higher written premiums by the captive, fee increases, or a combination of the two.

In 2001, according to CICA, 58 percent of survey respondents found their fronting/risk-sharing services to be an “excellent value.” In 2002, however, only 37 percent rated their services as excellent.

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

Special Reports /

Captives Cite Troubles With Their Fronts

Related Stories

Recommended For You