Ad Hoc Group Tackles Fronting

By Caroline McDonald

NU Online News Service, April 17, 4:07 p.m. EST? A surging shortage of fronting insurers, accompanying the boom in new captive insurers, has provoked an ad hoc group of captive specialists to seek a remedy, an industry expert reported.

If their effort is successful the problem of front company scarcity and rising fronting commissions might by solved by year end, said Michael R. Mead, president of M.R. Mead & Company, LLC, a consulting intermediary in Chicago.

Mr. Mead, a past chairman of the Captive Insurance Companies Association, said the effort to find a solution to the fronting shortage involves a group of captive experts.

"Fronting is the issue that still remains high on everyone's list, if not at the top," Mr. Mead said. "Clearly there is still some fronting going on but it is getting a lot more difficult."

Fronting is an agreement by an insurer to issue a policy on behalf of a captive insurer. Typically the front would write the risk for a location where it is licensed but the captive is not. The captive would then take the entire risk.

Mr. Mead, who is currently conducting CICA's fronting survey, said results of the study have not yet been released but that fronting continues to be identified as a problem by those surveyed.

Mr. Mead revealed he has been involved in a project for several months that may "provide some form of a solution to the fronting dilemmas."

At this point, "I can say that there are a group of members of CICA who have talked to me about coming up with a solution to their perception to a reduced number of carriers doing fronting, and in their view, the onerous requirements of some of these carriers," he said.

Mr. Mead said he is working with several insurers already in existence "that don't do [fronting] now."

However, he said, "There are a lot of constituents that have to be satisfied," including regulators, rating agencies, chief financial officers and chief executive officers.

He said so far two attorneys, an actuary, a former insurance company CEO, "a half-dozen members of CICA and a half-dozen people outside of CICA with similar issues" are involved in structuring a business plan which could be in place by the end of this year.

He said the basic theory is that captives would be able to control their own fronting. "It is not that simple but I think it is doable," he said.

Mr. Mead added that, "I have to emphasize that fronting is not an issue for everybody, there are still a lot of companies doing fronts, and a lot of companies happy with their situation."

Whether or not a company can find a front, he said, isn't a matter of the size of the company, but "what we call in the insurance business 'pig iron under water.'"

When pig iron is under water, he explained, it has "no chance of burning. So any risk today that is pig iron under water [a safe risk] has no problems."

Underwriters in the current market "don't have to take on risks that aren't safe, he said, "and why would they," he asked.

"There just isn't enough competition at the moment, and so we're trying to inject a little competition," Mr. Mead said.

Special Reports /

Ad Hoc Group Tackles Fronting

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