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June 2006 Pulse Survey Analysis:
What's New With Captive Fronting?

 In partnership with captive.com, Towers Watson conducted this pulse survey to take a look at the issues involved in reinsuring your captive.

This analysis was written by analysts at Towers Watson.

The June Pulse Survey asked questions about fronting and reinsurance. The survey elicited 59 responses, with 37 being from single-parent captives and 22 being from group captives.

When asked how their most recent fronting costs changed over the previous year, 50% of the single-parent captives said the same or less; 22.7% said costs were up just 1%-10%; 18.2% said they were up 11%-20%, and 9.1% expect costs to be up more than 20%. For group captives, an even higher percentage of 63.6% said the costs were the same or less; 27.5% said they rose 1%-10%, and just 9.1% reported increases of 11%-20%.

What about possible difficulties in the upcoming year? Fifty percent of single-parent captives and 36.4% of group captives are concerned about collateral demands. A lesser percentage of 13.6% of single-parent and 9.1% of group captives are worried about cost increases.

The majority of group captives (63.6%) and 31.8% of single-parent captives expect everything to be about the same.

Comment: We were surprised as to the lack of concern among group captives. Collateral demands have been increasing across the board in this hard market, and it is hard to believe group captives won’t be affected as much as single-parent captives.

We were also interested to see the linkages between fronting and reinsurance. When we asked whether the front also provided the organization or captive with coverage immediately above the retained layers, 40.9% of single parents and 72.7% of group captives said yes. For those that didn’t, 18.2% of single parents and 18.2% of group captives said the captive bought reinsurance from an unrelated insurer; 22.7% of single parent captives said the parent or organization bought excess insurance from an unrelated insurer (this question is not really relevant to group captives), and 18.2% of single parent and 9.1% of groups bought no coverage excess of the captive retained layers.

Comment: Wow! No coverage above the captive? Maybe the captives are quite large (not likely), insure just the top layers of programs (only slightly more likely, especially if it is a captive designed to access terrorism) or the risks are uninsurable (more likely); or the costs are prohibitive (also more likely). We were also struck by the high percentage of group captives that buy their excess coverage from their fronts. We believe this might raise a question as to the added value of their reinsurance brokers and could question the fees they may earn.

So why does the front provide this coverage? For single-parent captives, the leading reason was it was easy (27.3%), followed by being the most economical (18.2%), they had to (13.6%) and finally they got better terms (9.1%). (Almost half said the question was not applicable to them.)

For groups, being the most economical was tied with “they had to” (both at 27.4%), followed by being easy and getting better financial terms (both at 9.1%). No one said no one wanted them, but 18.2% said they had never been given or considered another option.

Comment: Again we ask, what is the role of the retail and reinsurance brokers in these cases?

 

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