SCOTTSDALE, ARIZ.--Fronting costs for captive insurers were 5 percent or less of annual premium for 59 percent of respondents, compared to 44 percent last year, according to a survey.

Conducted by the Captive Insurance Companies Association (CICA), the 2008 Captive Survey on Fronting, Reinsurance and Employee Benefits, presented at CICA's 36th Annual International Conference here, found that 26 percent of those polled reported fronting costs were 6-to-10 percent of annual premium, while only 2 percent reported fronting costs at 11-to-15 percent of annual premium.

The survey also found that respondents listing top challenges for captives had a dramatically increased concern about service issues, which rose from about 12 percent in last year's survey to 36 percent in 2008.

Michael R. Mead, president of Crusader Captive Services LLC in Chicago, president of the Arizona Captive Insurance Association (AzCIA), and CICA director, who heads the survey, said the big surprise in the survey was "the answer on service."

"I'm not even sure what it means--it was significant enough of a response that I think we need to try and figure out what they were trying to say," he commented.

Former surveys, he said, map concerns shifting from availability to cost to reinsurance, "and now they say service. Where did that come from?"

He said that this could mean that since availability and security are no longer issues, more focus is on service.

He speculated captive owners could be considering responsiveness to requests or an understanding staff.

Mr. Mead said respondents could be referring to policy issuance. "That's always a complaint. People are too slow to issue policies."

The issue of service leaves a goal for next year, he said. "We have to find out what they meant by that."

Mr. Mead noted that the issue of availability has been reduced "by more players coming in and by a lot of captives finding ways to do business without a front."

For example, he said risk retention groups are writing direct. "If they are not writing workers' compensation or another regulated line, they don't need a front. I think more and more people are seeing that," he noted. "At least a third of our captives don't need a front."

Other challenges listed were tax concerns, 22 percent; reinsurance, 13 percent; and concerns for fronting, 9 percent, CICA said.

Although the 2008 CICA survey concentrated on fronting issues as it has in past years, the scope of the survey was expanded in recent years to include reinsurance issues, employee benefits in captives, and comparative financial information about captives.

Survey highlights:

o Ninety-two percent of respondents listed admitted paper as one of their primary reasons for using a fronting carrier, with regulatory compliance as the next highest reason at 51 percent.

o Eighty-six percent of respondents rated the overall level of importance that fronting represents to their captive as either "very important" or "important."

o Fronting carriers used most by respondents were:

AIG--41 percent

Old Republic--18 percent

Zurich--15 percent

ACE--12 percent

All other fronting carriers were cited by less than 10 percent of respondents, but many respondents used more than one fronting carrier.

o Fifty-seven percent of respondents reported no change in the cost of fronting from the prior year, while 24 percent reported a decrease in costs and 19 percent said there was an increase in costs. Most said the increase was less than 5 percent.

In response to a question about the kind of collateral required (with 81 percent of respondents reporting that collateral was required), letters of credit were named by 78 percent of respondents, with trust accounts named by 31 percent and cash by 14 percent of respondents.

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Fronting Costs Decline For Captives, Survey Finds

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