| Whether you are negotiating a fronting fee with an | | | | insurance policies in the United States should apply for |
| insurance company for the first time, as you have a | | | | an A.M. Best's rating. If we remember captives are a |
| "start up" captive insurance company, or you are | | | | long time investment and by getting an "A" rating from |
| looking to renegotiate a "renewal" captive company | | | | Best's, the captive becomes a substantial asset. |
| fronting fee, you are going to be in for the insurance | | | | Reciprocity among captive owners can be another |
| education of a lifetime. | | | | way of eliminating the "fronting" fee. Each owner uses |
| The cost of "fronting" goes up on the very basis that | | | | the "A" rated captive for each other's risks, and |
| there is a shortage of insurance companies willing to | | | | purchases a sophisticated reinsurance program behind |
| "front." The insurance market losses companies like | | | | both captive insurance companies. When fronting fees |
| Quanta Capital, Alea, etc. and thus reduces the options | | | | approach double digits, it is necessary for captive |
| available. Where are the new fronting insurance | | | | owners to seek alternatives to "fronts." Creative |
| companies going to come from? Hurricanes Katrina, | | | | solutions need to be implemented, and captive |
| Rita, and Wilma have brought havoc to the property | | | | company budgets need to have the financial |
| captives, where we see fronting fees rising to 15%. | | | | resources to explore alternatives. |
| The new Bermuda companies will acquire U.S. | | | | Finding "fronts" for Contractors Pollution Liability |
| insurance company platforms and will be the "fronting" | | | | Insurance is another area that is getting significant |
| insurers of the future. | | | | attention. General contractors, residential or |
| Owners of captive insurance companies must realize | | | | commercial, trade contractors, carpentry and plumbing, |
| that "fronting" insurance companies need to be | | | | specialty contractors, foundation and pipeline, and |
| approached on various levels of management, with | | | | remediation contractors, are all candidates for captives, |
| preferably senior management getting into the decision | | | | and in the early years require "fronts." Captives can |
| making process early on in the negotiations. | | | | substantially reduce the insurance costs of traditional |
| Underwriting Departments are playing a greater role in | | | | pollution coverage for contractors, especially when |
| captive fronting, with the financial departments looking | | | | layering of policy limits is introduced above the captive |
| closely at the credit risk of the parent transaction. For | | | | retention. Customary pricing above the captive |
| instance, several years ago, construction companies | | | | retention follows the simplistic approach that the lower |
| would capitalize captive insurance companies just to | | | | liability layers are priced higher than the upper layers, |
| insure the self-insurance deductible under their Owner | | | | again giving the captive owner a "pricing" discount. |
| Contractor Insurance programs. Now "fronting" | | | | The identification of the "fronting" carriers has not |
| insurance companies are examining the financial | | | | changed dramatically in the last few years: |
| statements of these same construction companies to | | | | 1. AIG |
| make sure they can sustain the ownership of the | | | | 2. ACE |
| captive insurance companies. Interestingly enough, | | | | 3. Old Republic |
| captive owners need to continue to monitor the | | | | 4. Zurich |
| financial statement of their fronting insurer, and to be | | | | 5. Liberty Mutual |
| on top of any potential rating downgrades by the | | | | 6. Discover Re |
| rating organizations. Insurance company management | | | | 7. Chubb |
| historically has had a tendency of "failure to disclose" | | | | 8. Hartford |
| negative results. | | | | 9. Arch |
| Fronting insurance companies are playing a greater | | | | The negotiating process with each of these carriers |
| role in the selection of the domicile for the captive | | | | has always been a challenge for captive owners. |
| insurance company. Domestic versus offshore | | | | Insurance company "fronts" are a dynamic group, and |
| domicile continues to be debated. Even on shore | | | | with people constantly changing positions, requires that |
| domiciles like New York State, with its 35 captive | | | | you pay significant attention to your fronting carrier to |
| insurance companies, are trying to expand the captive | | | | continually provide favorable relationships and eliminate |
| concept by reducing the threshold, $100 million parent | | | | misunderstandings. When was the last time you asked |
| net worth to $25 million parent net worth captives. | | | | your fronting carrier, how is my program going rather |
| More advertising needs to be injected into the New | | | | than react to their letter saying they are going to |
| York captive initiative. | | | | cancel your "fronting" relationship because they are |
| Most of the experienced, fronting insurance companies, | | | | returning from that particular insurance product line. |
| have shown the ability and expertise to "front" | | | | There have been a number of studies on what the |
| captives from Vermont domiciles to Hawaiian | | | | "fronting fee" includes, or should include. The amount of |
| domiciles, and from Barbados to Bermuda. The focus | | | | these fees keep changing but the overall concept |
| has been to continually drive down overhead | | | | remains the same. Focus and concentrated efforts |
| expenses and those domiciles doing this are attracting | | | | are required to keep this "fee" economically effective. |
| all the new captive formations. | | | | Among the recent "fronting fees" the following is |
| Interestingly enough, domestic captive domiciles did not | | | | included: |
| lead in 2005 formations, with Bermuda and the | | | | 1. State Premium Taxes (not negotiable); |
| Cayman Islands accounting for 134 captive formations. | | | | 2. Federal Excise Taxes (not negotiable); |
| Vermont with 37 captive formations led the United | | | | 3. Government schemes (not negotiable, but try and |
| States. | | | | get how they are arrived at); |
| Fronting insurance company pricing for the risks going | | | | 4. TRIA charges (usually not negotiable); |
| into captives are getting a closer look by the actuarial | | | | 5. Aggregate protection (negotiable, look at the |
| profession. Captive owners have come to recognize | | | | concept of purchasing this yourself from outside the |
| they need their own actuarial support when | | | | structure); and |
| disagreeing with the fronting insurance company's | | | | 6. Profit margin for carrier/fronter (negotiable). |
| assessments of what is the correct price for the risk. | | | | If loss ratios are attractively low for your captive |
| Whether you are a residential contractor in California | | | | insurance company, make every effort to obtain a |
| or a nursery home in Florida, your captive requires | | | | lower "fronting fee." Insurance carriers are always |
| adequate pricing executed by the fronting insurer. We | | | | seeking low loss ratio business even as a "front." If you |
| are going to see more litigation in the future between | | | | can, try to influence the decision maker. Many "fronting |
| captive owners and their front insurance companies, | | | | fees" get renewed as is when they are comparatively |
| as the disagreements over pricing continue to persist | | | | high in mature, and it is in the carrier's interest to renew |
| on each renewal. | | | | as is because there is little additional costs in doing |
| Captive owners want their front insurance companies | | | | renewals. It is the "lifeblood" of the insurance company. |
| to come up with independent prices for each risk, and | | | | On the basis of regulatory and rating agency fear, |
| that concept continues to be a problem with the front | | | | "fronting" carriers have made a conscious effort to |
| company. When it is admitted, and has to use their filed | | | | require and substantially increase the collateral |
| rates. Insurance company market conduct reports are | | | | requirements they are asking for from captive owners. |
| going to expose front carriers that they are violating | | | | This is an area of negotiation and as many Agent |
| their rate filings when writing primary insurance | | | | Owned Captive Insurance Company Owners have |
| products which are reinsured back to the captive | | | | found out, too late, over collateralized programs lead to |
| insurance company. | | | | the inability of the agent to fund the letter of credit and |
| The more mature captive insurance company, with | | | | therefore the "front" cancels the program. |
| over five years of financial history, needs to have a | | | | Captive Owners need to know that over-funded |
| committee of its Board of Directors look closely into | | | | collateral is another way a "front" company can |
| the entire costing structure of the fronting fee. This | | | | access additional capital for growth. You need to |
| would be a great excuse for members of the captive | | | | understand the true components of the collateral |
| board to understand this important transactional cost. | | | | required: |
| What are the detailed components of the fronting | | | | 1. Loss Reserves (Schedule F - loss reserves plus |
| fee? How are they monitored by the captive owner? | | | | unearned premium reserves and Incurred But Not |
| When was the last time a new fronting company was | | | | Reported losses) ... IBNR deserves the most attention |
| asked to quote on the captive? Once the captive | | | | since these are estimates, and does the Captive |
| board gets this training, the Boards will not be "rubber | | | | Owner want to pay for an independent actuarial study |
| stamps" and exercise more judgment at insurance | | | | for the loss payout pattern, and full development. |
| decision making. | | | | 2. Many "front" companies want funding that would |
| More and more mature captives are looking to write | | | | include funding the letter of credit equal to high loss |
| their Directors and Officers Liability Insurance into their | | | | ratios, this is despite the fact they had set the pricing |
| captive. The front insurance company writes the | | | | on the "fronted" policy. Owners need to have the |
| traditional D and O form, and that risk in then ceded | | | | expertise to challenge the methodology of the pricing. |
| back to the captive, acting as reinsurer. The exclusions | | | | In conclusion, "fronting" insurance companies provide |
| in the traditional D and O policy are then covered by a | | | | "licensed paper," which is asset value; they provide |
| direct procurement policy from the captive, eliminating | | | | regulatory compliance and finally support services. |
| the need for the front. The pricing for the direct | | | | Remember if fronting fees are greater than 5%, and |
| procurement policy should be controlled by the owner | | | | mostly in the 6-10% range. When going over 10%, it is |
| of the captive. In some aspects, a captive writing direct | | | | imperative that you look for another option. |