EXCLUSIVE: Captives Pay More For Fronting

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

Mr. Mead said that Discover Re was named as a fronting company used by many more people this year than last year, and "Kemper, while it was named, is out of the picture." Zurich is being used less as a fronting company, he said.

The response rate to last year's survey, according to CICA, was 34 percent of the CICA and VCIA memberships compared with this year's 30 percent, which CICA said was a result of a different data gathering procedure and the change to the electronic format now being used.

As with previous years, CICA found that more than 70 percent of respondents are single parent captives.

Risk retention groups made up nine percent of respondents and sponsored captives were six percent?double last year's number. Agency captives remained at three percent, and association captives declined to 10.4 percent from 16 percent last year, CICA said in a statement.

The figures represent an industry increase in the number of sponsored captives and the number of domiciles allowing their formation, CICA said.

The survey also found that the average age of last year's respondent captives was 11.8 years, while this year's average was 4.6 years. The number reflects the changing composition of respondents and an increase in the number of captives overall, CICA said.

Mr. Mead said that in this year's survey there was "a subtle shift" in some of the survey questions, which revealed that some people are no longer using fronts for their captives.

He explained that organizations writing a particular piece of business in their captive?such as property?who 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, he said, the hospital does not have a problem "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.

Mr. Mead said that many companies surveyed are not having problems with their fronting companies and continue to use the same fronting companies they used in the past.

The survey found that fronting costs are rising as much as 20 percent for some captive owners. This was surprising, he said, because captives "need to pay 10 percent to make it work."

Fronting fees, according to CICA, remain at less than 10 percent of annual premiums for more than 56 percent of respondents. Five percent of respondents reported costs in excess of 20 percent.

Mr. Mead stressed that CICA and VCIA would like to see more survey participants. "We have made it easier by putting it online, it's all electronic."

Anyone interested in participating in the ongoing survey can visit the CICA Web site at www.captiveassociation.com, he said. "We'd like to get as many participants as possible because it increases the credibility of the survey," he said.