Creativity Rises With Fronting Costs

By Caroline McDonald

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

The survey was conducted online for the first time by Minneapolis-based Captive Insurance Companies Association, in conjunction with the Vermont Captive Insurance Association, located in Burlington, Vt.

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

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

Zurich North America spokesman Keith Owens told National Underwriter, “We continue to have a significant number of single parent and group captives, and we evaluate these opportunities as we do all of our businessthose who offer us a good commercial opportunity.”

Mr. Mead noted that there was “a subtle shift” in some of the survey questions this year that revealed that some captives are no longer using fronts.

He explained that organizations writing a particular piece of business in their captivessuch as propertywho have general liability insurance and own their building “don't necessarily have to show anybody a certificate of insurance. We're seeing people who, rather than go through all the difficulty of lining up a front, say 'Who needs it?'”

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

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

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

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

Another service offered by fronting companies, which Mr. Mead said 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 is a very hard job. It takes a lot of time and a lot of skilled resources.”

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

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

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

On the other end of the scale, the survey found that those who view the pricing as inexpensive dropped from 25 percent in 2000 to 10.9 percent last year.

The response rate to this year's survey, according to CICA, was 30 percent of the CICA and VCIA memberships compared with last year's 34 percent. As in prior years, more than 70 percent of respondents are single parent captives.

Risk retention groups made up 9 percent of respondents and sponsored 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 serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.


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