While he is seeing a stronger demand for fronting, the number of quality companies doing fronting has dwindled, he said.

During the soft market, there were a number of companies that were fronting “on a very loose basis,” he said, explaining that programs were not properly underwritten.

“As a result, the market for fronted captive programs has tightened up considerably,” he said. “The number of quality fronts has diminished and those that are doing it, are doing it on terms and conditions that are more responsible then perhaps what some of the companies had done in the past.”

The amateurs have gotten out of the fronting market, acknowledged David J. McManus, president of Arthur J. Gallagher & Co. (Bermuda) Ltd., noting that claims control and underwriting control are the number one concerns of fronts in todays market.

Soft market conditions tend to attract fronting companies that havent set up departments or units to specialize in fronting and therefore, dont have the expertise and systems to support it, he said.

Undoubtedly, there were organizations that were going through difficult times and got into fronting for the fee income, he said. “They were fronting way too cheaply, and they also didnt know what they were doing,” he said.

Mr. McManus said that during the soft market it was easy to get a program fronted for 3-5 percent by some carriers. Nowadays, he added, the fronting prices have doubled to 6-10 percent, depending on the account and insurer.

While fronting prices have risen substantially for some risk managers, the insurers that are good at fronting have charged more consistent prices, he said.

Claims control and underwriting control is the number one concerns of fronts in todays market, said Mr. McManus.

Peter J. Mullen, president of Artex Underwriting Managers, the rent-a-captive facility for Arthur J. Gallagher in Bermuda, said he attended the annual meeting of the Risk and Insurance Management Society in Chicago this year. “We had meetings with eight or 10 markets there to talk about captive fronting and reinsurance,” he said. “We were nicely surprised by the number of people interested in the business.”

However, he said, there was a consistency of approach from each one of them none were interested in pure fronting (where the carrier issues the paper and then reinsures 100 percent of the risk.)

“They were all interested in underwriting the business. So theres a more proactive approach to underwriting and understanding the business they were seeing,” he said.

There was also a more limited willingness to unbundle claims, Mr. Mullen said, noting that in the past some carriers would unbundle claims to maybe 30 or 40 different third-party administrators.

“Companies today will either not unbundle because they want to handle the claims themselves or will only unbundle to the major top five or six third-party administrators,” he said.

Mr. Mullens other observation from RIMS was that the fronting carriers were being very selective about the business they would write due to limited resources in their captive departments. The volume of submissions entering a carriers captive department “has really shot up in the last two years,” he explained.

When risk managers think about fronting prices, they need to consider “the broader context of the cost of issuing the paper, taking a premium for taking some risk on the program and also what happens with claims handling,” said Mr. McManus.

“I think the guys who do it better and who survive are the ones who issue the paper, take some risk on the program” and charge a fee for handling and controlling the claims, he said.

“The responsible companies are looking at possibilities of fronting and saying here are the terms and conditions under which well do it,” said Mr. Dangelo at AIG. “If its a captive, they will underwrite the financial condition of the captive, they will require sufficient collateral to cover the losses and they will charge upfront for the proper amount of fees and expenses associated with doing a captive program.”

Carriers have problems with fronting when they dont do the upfront underwriting, they dont structure the program properly or they administer it very loosely, he said.

Once the fronting carrier goes out of business, the captive owner may find that claims are paid more slowly because theyre being funneled through a state guaranty fund, which steps in when an insurer becomes insolvent, Mr. Dangelo said.

He cautioned risk managers to pick their fronting partners very carefully and evaluate very closely “the capabilities, the commitment and the financial strength of the companies you do business with.”

Unfortunately some risk managers say, its just a front and the price is cheap, he said. However, they may discover three or four years from now, although they have significant fronting exposure to run off, that the company has gone out of business, the people they dealt with have left the company or the company doesnt care about this business any more, Mr. Dangelo said.

Captive owners need to make sure that the programs they are reinsurers are appropriately underwritten with the proper amount of discipline up front, he said. “If either the underwriting standards are too relaxed or the pricing is too low, ultimately the captive is going to get hurt.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 26, 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.