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Fronting Considerations
A B.C. captive is a licensed insurance company in the Province of British Columbia. The fact that other provinces do not recognize a B.C. captive as being a licensed insurer presents no more of a problem than it would to a captive domiciled outside of Canada. In order to reduce uncertainty surrounding regulatory issues faced in these situations, most captive programs that extend outside of British Columbia are 'fronted'. This means that a licensed insurance company is used to issue the policy to the insured, and a reinsurance agreement is entered into between the licensed insurance company and the captive. The fronting company can, and in most cases does, provide other services to the insured, such as loss adjusting and reporting, policy issuance, and assistance in premium rating. The fronting company can also participate in the program as an excess insurer, providing insurance above the limits that the captive wishes to retain for its own account. For U.S. exposures, a B.C. captive would be considered a non-admitted carrier and would be in the same position as any other captive in the eyes of the various state regulators. Therefore, to avoid regulatory problems, it is advisable to front U.S. exposures. There is currently a flurry of activity with respect to U.S. regulations in this area and the outcome is not certain. Fronting services do come at a cost, which typically varies from 5% to 12% of the gross premium. It may be possible for the captive to write direct policies covering risks domiciled in other provinces; however, this is subject to some degree of uncertainty. The operating protocol of the captive must be designed and followed with the utmost care and attention. If a program is written direct, the other services typically provided by a fronting company must still be obtained, and the applicable costs taken into account. If there are significant exposures in the Province of British Columbia, there is a distinct advantage to a B.C. captive as that portion of the policy that applies to British Columbia risks can be written direct by the captive, and fronting fees would not apply to the premium attributable to those risks. In practice, most captive programs are fronted, irrespective of where the captive is domiciled.
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