The number of fronting companies available for captive insurers has more than doubled over the last few years–a product of the softening commercial insurance sector and the lures of the ever-broadening alternative risk-transfer market, according to a captive manager.
Indeed, captives have proliferated despite the softness of the traditional insurance market–thanks in part to greater access to fronting companies, observed Christopher L. Kramer, senior vice president of Roundstone Captive Management Ltd., in Westlake, Ohio.
"It seems the insurance carriers that had retreated during the latest underwriting cycle are coming back to the [fronting] market–not only in capacity, but they are expanding their business strategy to recognize the rising popularity of captives," he said, citing, "specifically, protected-cell captives in both property-casualty and life and health."
Mr. Kramer noted that fronting carriers are "following the growth and acceptance" of segregated-cell companies.
"Now that the ART market, including captives, has captured more than 50 percent of all the premium dollars, they have to accept that," Mr. Kramer said. He noted that underwriters are trying to find an "enterprise solution" for their contracted agents, brokers or consultants.
"They're good at risk transfer," he said. "They know that if they don't do the deal on a traditional basis, the alternative market will take it away from them–forever."
Initially, he said, insurers are "dipping their toes in the market and they will stay clearly in their underwriting guidelines." This means, he added, that "if they are writing transportation, they're not going to jump into the long-term care business."
Mr. Kramer said he has noted 15 fronting companies–more than double "the usual seven."
He pointed out that risk retention groups also can be used as fronts for captives. Some RRGs, he said, use a captive for a policyholder wishing to take a large self-insured retention. "So the captive becomes a very useful vehicle as an ancillary service to the policyholders of the RRGs, and the RRG itself becomes a front."
Use of both an RRG and a captive by an organization, he added, is "proliferating." This is because of the federal Liability Risk Retention Act, which allows an RRG to use unauthorized reinsurance.
"This is fine with regulators as long as it's properly collateralized," he explained. "So you have a wave of sophisticated regulators who realize that the market buying behaviors are changing."
"[Underwriters] know that if they don't do the deal on a traditional basis, the alternative market will take it away from them–forever."
Christopher L. Kramer, Senior V.P.
Roundstone Captive Management Ltd.
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