8 March 2023Analysis

Captives and fronting: beware the pitfalls

Captive owners who are talking to and choosing a fronting partner need to be aware of a number of potential pitfalls, a panel at CICA 2023 has warned.

The panel session, titled ‘Navigating fronting and reinsurance – keys to success’, looked at how being able to obtain fronting and reinsurance can make or break a captive insurance company and how best to navigate this process.

Panellists included Courtney Claflin, head of Insurance at Fluid Truck, Glen Stapleton, national sales account executive at PMA Companies, Old Republic Insurance Group, Jason William Tyng, captive lead at HDI Global Insurance Company, and Robert Winsley, executive director at Howden Tiger.

Claflin spoke from a captive owner perspective and warned that some fronting companies can be fickle and that owners must be prepared for possible setbacks. He said owners should use a partnership approach, not a vendor approach, and he stressed that the fronting company must specialise in the captive owner’s industry, with proper forms, filings and jurisdictions. He said the front must also have the expertise to grow the arrangement if the captive launches new and different coverage.

Stapleton gave a fronting company perspective, saying that captive owners must have a realistic idea of the arrangement that they need, such as a full front or risk sharing. The captive’s structure also needs to be clear, feasibility studies should be carried out, the timeline must be realistic and any reinsurers used must be on an approved list.

Tyng said that it was important to know that the timeline for creating a group captive is going to be longer than just for a single captive and that it can be like herding cats. He stressed that financial reporting was important to structure, in terms of timing, as work to create the captive began. For example, meetings would be more frequent earlier on in the timeline.

Finally, Winsley stressed that from a reinsurance broker’s perspective the global reinsurance market is extremely difficult. This, he said, creates opportunities for captives, making it a great time to set one up.