INDIAN WELLS, CALIF.--Chaos in the financial markets has migrated to captive insurers, meaning that fronting issues have taken a back seat to issues such as collateral and regulation, according to an annual survey conducted by the Captive Insurance Companies Association (CICA).

The survey, presented here today at CICA's 37th annual conference, found that of the 83 respondents who participated in the 2009 Fronting Survey, 97 percent listed admitted paper from an entity licensed to do business in their state as one of their primary reasons for using a fronting carrier, with regulatory compliance as the next highest reason at 40 percent.

Eighty-three percent of respondents rated the overall level of importance of obtaining a U.S.-licensed or admitted carrier for fronting their captive as either "very important" or "important," CICA said.

Although the 2009 CICA survey concentrated on fronting issues as it has in past years, CICA said the scope of the survey also includes reinsurance issues, employee benefits in captives and comparative financial information about captives.

"This year's survey was encouraging in many ways, because it showed that fronting is not the issue it used to be," survey committee member Michael R. Mead, president and chief executive officer of Lionheart Insurance Group, told National Underwriter.

Mr. Mead, the original founder of the survey, said that some new categories added to the survey will be more important going forward, such as collateral and regulatory issues. "They're new this year and I think as we go forward they're going to make an even greater impact on the survey."

Changes in survey responses, he said, are a reflection of what is going on in the financial services markets. "Last year's survey showed that tax was a big worry." Now, he pointed out, "banking issues are huge--letters of credit, who issued them, how much are they worth any more--it's become a real problem."

Mr. Mead said last year's survey found that service was the biggest issue, followed by fronting. This year, he said, service has taken a back burner.

"The information a captive owner could take out of this [survey] is that fronting is not the problem it used to be," Mr. Mead said. "Reinsurance may become--and collateral definitely is going to be--an issue. But things are changing so quickly in the marketplace that you definitely have to be paying attention to your captive."

For fronting, those who responded to this year's survey--not necessarily the same respondents as last year, a committee member emphasized to NU--reported using the following fronting carriers:

o AIG--42 percent

o Ace--27 percent

o Discover Re, Zurich, Liberty Mutual, PMA, St. Paul/Travelers and Old Republic--11.5 percent for each carrier.

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

Of those surveyed, 68 percent characterized the price of fronting as "reasonable," with 26 percent characterizing the price as "expensive" and 6 percent as "inexpensive."

Fifty-six percent of respondents reported no change in the cost of fronting from the prior year, while 21 percent reported a decrease in costs and 23 percent saw an increase in costs. Eighty-five percent reported that collateral was required.

A significant majority of respondents represented single-parent captives (58 percent), followed by association captives (17 percent), risk retention groups (17 percent), segregated cell captives (9 percent), and agency captives (2 percent).

Of respondents, 84 percent reported being domiciled in a U.S. jurisdiction, with 16 percent domiciled off-shore. Sixty percent of respondents have been in existence for six or more years, 36 percent in existence for one-to-five years, and 4 percent in existence for less than one year, CICA said.

When asked what kind of collateral was required, letters of credit were named by 72 percent of respondents, trust accounts were named by 55 percent of respondents, and cash was named by 17 percent, CICA said.

In reinsurance, 73 percent of respondents reported they considered the price/value relationship of their reinsurance to be reasonable; 40 percent reported that their reinsurance costs are the same as the prior year, with 30 percent reporting an increase and 30 percent of respondents reporting a decrease.

Given the investment markets, CICA said it was no surprise that more than 50 percent of respondents reported that the average investment yield on invested assets in 2008 was less than 3 percent, compared to 2007 when a significant majority reported yields above 5 percent.

In 2008, top challenges to captive owners were listed as: collateral concerns (22 percent), followed by expanded utilization concerns (18 percent), fronting concerns (14 percent), service concerns (14 percent), taxes (12 percent), and reinsurance (8 percent).

In 2007, the biggest challenges were: service concerns (36 percent), tax concerns (22 percent), reinsurance (13 percent), and fronting (9 percent).

The survey was drafted and approved by a CICA committee and was conducted by the independent consulting firm of Veris Consulting, LLC, of Reston, VA.

Participants were solicited through communications from CICA and through the collaborative efforts of a number of captive domicile trade associations. All participants were guaranteed anonymity and the results were compiled by Veris Consulting without identifying any of the participants.

CICA said that full survey results will be made available to CICA members, most likely in May, on the CICA Web site, www.CICAworld.com.

Special Reports /

Fronting Issues Less Of A Problem, Say Captives

Related Stories

Recommended For You