|
Captive Resource Center
Businesses and Associations
Research & Information
|
The Hardening Market's Effect on Fronting Carriers
Given the state of the insurance market in 2001, this
question has been coming in to captive.com with increasing frequency.
We wish to thank Jeff Novick of Meadowbrook Insurance Group for submitting
a concise, informative response.
| <<QUESTION: Given the current tightening commercial liability
marketplace in the US, I am interested in knowing the current availability
of fronting carriers for captives and/or self insured programs.>> |
|
As with any industry change, an insurance
company's resources are always examined and evaluated for their
most efficient use. For the most part, this use of resources is
concentrated on Return-On-Investment (ROI), and shareholder value.
The recent tightening of the insurance market has
effectively eliminated many "Front" carriers. The carriers that
remain have benchmarked higher minimum premiums and higher fees.
Again, this relates to the allocation of insurance company resources,
which equates to the efficient use of surplus and capital.
|
|
| |
Jeff
Novick
|
Insurance companies have learned that fronting alone does
not produce the ROI that shareholders demand, as evidenced by the recent
fallout of many carriers that were formally involved in fronting. To generate
returns that are palatable to investors, insurance company assets need
to be utilized in a risk-taking manner. Thus, many "Front Companies" are
now seeking to take on at least 10% of the working or primary layer of
risk.
There are advantages when a "Front Company" takes some
of the risk:
- Greater focus on achieving underwriting results;
- All parties are "on the same page"; the carrier
results and the captive results are determined by the same factors;
- Greater cooperation between the carrier and the
captive. This occurs since the carrier is not just receiving fees at
the expense of the captive. The captive is also attuned to the carriers'
underwriting and regulatory concerns;
- Less change over in front carriers for the captive.
Since the front carrier is also on the risk (thus dealing with a "tail"
or long-term loss development), the carrier is apt to continue on with
their partner, rather than just cutting and running when only fee income
is involved.
Based on the advantages listed above, some fronting
carriers have determined that their fronted programs need to include taking
some underwriting risk within the working or primary layer. Will these
carriers still offer pure fronting with 100% of the underwriting risk
passed on to others? Yes, however the fee structures required are often
prohibitive. Thus, it is easier (and often more prudent) for all parties
concerned, that the captive's policy-issuing carrier share in the risk
in order to keep the fees competitive.
Jeffrey D. Novick (jnovick@meadowbrook.com)
Vice President
Meadowbrook Insurance
Group
www.meadowbrook.com
|
