23 June 2023Analysis

AM Best publishes new fronting report

A new AM Best special report claims that evolving risk-sharing partnerships between specialty commercial-focused fronting insurers and their reinsurers have broadened the solutions being made available to insurance buyers.

The report notes that the number of fronting carriers and amount of insurance premium flowing through this channel have increased due to changing market conditions and growing interest from managing general agents (MGAs) and capital providers.

According to AM Best: “In fact, direct premium written on an aggregated groupwide basis by AM Best-rated fronting carriers increased 43% on a year-over-year basis to $10.6 billion in 2022. Fronting companies in the surplus lines/specialty commercial marketplace, particularly hybrid fronting companies, are also growing in number.”

Traditionally, fronting insurers have borne little, if any, of the underwriting risk while ceding out most, or nearly all of the risk and premium to a reinsurer in return for a fee, the report claims. In recent years, numerous fronting companies have been formed to take advantage of favourable market conditions and to build premium revenue. This comes as reinsurers grow more selective in choosing business lines and primary sector partners.

“The market is ripe with opportunities for companies offering hybrid fronting arrangements to demonstrate their value and gain greater acceptance,” said David Blades, associate director, AM Best.

However, Blades also noted that the bottom-line results for reinsurers depend on the effectiveness of a respective fronting carrier’s acumen with respect to executing risk selection, underwriting, pricing and making claims settlement decisions. These fronting arrangements can require more frequent communication, which may take the form of ongoing conversations about reserving, pricing or premiums. The effectiveness of the communication between fronting companies and reinsurers, and the scrutiny to ensure that the business written meets the profile and standards established by both, is vital to the long-term success of these partnerships.

According to the report, the integral role of MGAs and their historically specialised nature have served to strengthen the value of fronting companies. MGAs can bring efficiency and value to the distribution chain since they do not operate with the types of legacy placement platforms common throughout the insurance industry.