Fronting is complex; picking the right partner is critical: CICA panel
The captive insurance landscape is evolving, presenting both challenges and opportunities for businesses looking to establish and optimise their captive programmes.
That was one of the key messages from a panel debate, which took place at the annual CICA conference, taking place this week in Tucson, Arizona. Moderated by Courtney Claflin, director, CICA, the experts looked at key considerations in fronting carrier selection, reinsurance agreements, and negotiation strategies.
Jennifer Guidry-Burnham, vice president of marketing and business development at Great American Insurance Group, emphasised that when investigating a fronting carrier, it is crucial to assess various elements from both the insurer and captive perspectives.
“The financial strength of the carrier is key,” she stated. “You want a partner who can support the captive and align with the right reinsurance partners. Understanding the carrier's comfort with the structure of the captive and their ability to support it is equally important.”
Guidry-Burnham also highlighted the importance of product offerings and subject-matter expertise within a fronting carrier. “Not all carriers have the same level of bandwidth or expertise in supporting various products. Claims and service capabilities, third-party administrator (TPA) relationships, and brand reputation should all be taken into account.”
Steve Bauman, global programs & captives director at AXA XL, reinforced the significance of a comprehensive business plan when structuring a captive. “Reinsurance capabilities should be considered from the outset. A fronting carrier should not just be a short-term solution but a long-term partner that can grow with your captive,” he advised.
Bauman noted that fronting should not solely be viewed as a legal necessity. “Strategically, having a fronting company in place can offer brand protection, particularly when dealing with sensitive claims. Captives adjudicating claims directly with their customers can create complications. Having a fronting partner provides an added layer of insulation.”
Flexibility in reinsurance agreements is another crucial factor. Guidry-Burnham added, “Negotiating the structure of reinsurance agreements early on is essential. Not all MGUs have the appetite to take on specific risks, and it’s important to outline expectations from the beginning.”
One of the most critical aspects of establishing a captive is negotiating the financial aspects, particularly fees and collateral, Guidry-Burnham advised. “Fronting fees should be reviewed with an understanding of how they will evolve as the captive grows,” she said. “Economies of scale should allow for fee reductions over time.”
Collateral is another significant area of negotiation. Bauman warned: “Many deals fall apart at the collateral stage because the required amount is too high for the client to obtain. It’s crucial to address this issue upfront to avoid later roadblocks.”
He also highlighted the importance of reassessing the captive's structure based on performance. He pointed out that if a captive is performing well, there should be discussions about structural changes, such as moving from a pure retention model to participating in the underwriting profits.
Chris Nash, senior vice president, underwriting – alternative markets at Arch Insurance Group, said that people need to look closely at underwriting considerations and growth strategies. “Underwriting for captives requires a collaborative approach. Whether it’s a single-parent captive or a group structure, the key question is: how does this program provide a solution to a problem?”
He highlighted that industry trends have shifted significantly. “Fifteen years ago, California workers’ compensation was the primary driver for captive formations. Now, there’s increased demand for general liability and auto coverage, particularly on the East Coast. Growth strategies should account for these shifts.”
Another consideration is ensuring sufficient capital. “Twenty years ago, starting with $5 million might have been feasible. Today, we’re looking at a minimum of $15 million to $20 million to ensure a sustainable program,” Nash explained.
Yet another area requiring careful evaluation is the selection of third-party administrators (TPAs) and service providers. Bauman pointed out, “Fronting companies have preferred TPA lists, which can sometimes be restrictive. If a TPA is not pre-approved, it can slow down the onboarding process. Negotiating these relationships upfront is crucial.”
Nash added that carriers often hesitate to expand their TPA lists due to the associated costs and operational challenges. “However, for the right deal, everything is negotiable. If a captive demonstrates significant value, fronting carriers may be willing to adapt their preferred service provider network.”
The panel underlined the importance of strategic planning, thorough due diligence, and proactive negotiation when structuring and managing a captive. Whether evaluating fronting carriers, negotiating financial terms, or optimising underwriting strategies, a collaborative and flexible approach is essential for long-term success.
As Nash stressed: “Everything comes down to partnerships. If you build the right relationships, you can overcome most challenges and create a captive program that not only meets immediate needs but also supports long-term growth.”
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