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Pulse Survey Analysis: What's Up With Captive Fronting and Collateral Requirements -- Part 2

 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 second pulse survey of the three-part Fronting series, active in October & November 2007, attracted 52 captive owners or their representative managers or consultants. Based on the first question, respondents were split approximately two-to-one between single parent and group captive structures.

The second question on the survey asked, “If you have left a fronting carrier, did your previous carrier consider a collateral reduction for expired years?” A majority of respondents (62.5% of single parent captives and 50.0% of group captives) answered that this issue was inapplicable, presumably because they were not fronted or had not changed fronts if they are. Among those having left a fronting carrier, responses varied across single parent and group captives. Half of single parent captives said that they were given no collateral return, while 90% of groups were given either “substantial” or “modest” returns.

Asked about changes in collateral requirements from a multi-year fronting carrier, single parent captives generally reported that the same amount of collateral was required this year as in the prior year. Among groups, however, significantly less collateral typically was required compared to previous years.

Question 4 dealt with captives’ sense of the available capacity of fronting carriers to serve their market. Responses from both single parent and group captives were all over the map, ranging from “There is an abundance of fronting carrier capacity” to “There is an extreme shortage of qualified, financially sound fronting carriers available.” The majority of group captives, in particular, recognized such a shortage. Interestingly, 25% of single parents said there was an abundance of capacity, while none of the groups said this.

Asked whether they had considered the formation of an RRG to act as a fronting mechanism, 25% of single parent captives said yes, while 50% of groups considered this option.

The survey concluded with a question regarding how pure collateral decisions would be made in the future. The modal response among single parent captives was that they would go with reasonable collateral requirements suggested by their fronting carriers. As for group captives, the majority expect to engage in discussions with existing or potential new fronting carriers regarding more lenient collateral requirements.

In summary, group captives have indicated that there is a shortage of qualified, financially sound fronting carriers available to support their captives, and these groups plan to engage in discussions with existing or potential new fronting carriers regarding more lenient collateral requirements and make a decision regarding fronting arrangements based on the outcome of that discussion. Fully half of group captives have considered the formation of an RRG to serve their fronting needs.

Single parent captives generally find that the same amount of collateral is required this year compared to previous years, but in many cases feel that there should be more qualified fronting carriers available to serve them. Only 25% of single parent captives have considered the formation of an RRG to fill the “fronting gap.”

Some of the concerns voiced by the survey respondents are not surprising, especially as regards the group captives. These concerns likely also account for reasons why many others have in fact formed RRGs over the last four to five years. That said, the emergence of new fronting markets (e.g., SPARTA, AmTrust, etc.) may help alleviate some of the pressures, though even then these carriers may provide an option only to the larger captives, as these fronting markets generally target programs with premiums of $10 million or more, or the potential to achieve that premium level quickly.


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