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Pulse Survey Analysis: What's Up With Captive Fronting and Collateral Requirements?

 In partnership with, 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 recent re-launch of the pulse survey in August 2007 attracted 58 captive owners or their representative managers or consultants.. Based on the first question, respondents were split nearly evenly between single parent and group structures. The subject was a currently popular theme, fronting arrangements, and is the first in a three-month series on the topic.

A solid majority of respondents to the second question (72.7% of single parent captives and 71.4% of group captives) answered that they have a strong or virtually complete understanding of their fronting carrier’s approach in determining collateral requirements. Approximately 14% of single parents and 18% of groups expressed “some” understanding, with a handful admitting to little or no understanding, or an inability to obtain an explanation from the fronting carrier.

Asked what forms of security are required by fronting carriers, Question 3 revealed that letters of credit (LOC) were most popular with 36.4% of the single parent captive votes and 42.9% of group captive votes; hybrids (LOC/trust account/cash/parental guarantee) came in second with 22.7% and 39.3%, respectively. Good old fashioned cash was a near third for single parent captives with 18.2% of responses, but zero responses for groups. A relatively small number of survey takers answered that parental guarantees, trust accounts, or letters of indemnity (a write-in response), comprised their collateral requirement.

Question 4 dealt with fronting carriers’ interactions with captive owners regarding collateral amounts. Results indicated divergent trends between single-parent and group captives. For single parents, a dead-even split existed between the “completely or fairly collaborative” and “fairly or completely inflexible” category pairs. For groups, the ratio was weighted to the inflexible side, with 71.4% of votes versus 21.5%. In only one case for each of single parents and groups, a captive representative stated that its fronting carrier wanted things “my way or the highway.”

In summary, the survey results indicate that captive owners generally have a good understanding of their fronting carriers’ approaches to determining collateral requirements. However, it seems that carriers may be unwilling to negotiate these terms to any great extent, especially for group captives. Collateral requirements are most often satisfied with LOCs or hybrid arrangements.

We note that in recent years we have seen first hand among our client base that captives have been gravitating away from LOCs, often to trusts, in an effort to reduce costs and/or unencumber corporate credit lines.

While it is still too soon to ascertain whether credit demands may change as the credit markets tighten their reins in other areas (e.g., mortgage financing), liquidity issues may rise to the surface even in the seemingly unrelated insurance domain. Hopefully this pulse survey has shed some light on the often perceived cloudy landscape of fronting collateral requirements; the upcoming two surveys will delve further into related matters.


captive and ART resources