KBRA releases new fronting report

Kroll Bond Rating Agency (KBRA) has released a new report that claims that captives might be impacted by recent developments in the fronting market.

According to the KBRA report the insurance fronting space was a fairly stable and predictable sector for over a decade, characterised by an attractive market opportunity, plenty of capital to start up businesses, demand for well-rated carriers to provide fronting services, and growth in aggregate managing general agent (MGA) premiums as well as a rising proportion of MGA volume that flowed through fronting carriers.

However, two recent major events completely changed the fronting market: Alleged claims of potentially fraudulent letters of credit collateral from a single non-US bank related to transactions facilitated by Vesttoo, and an $81.5 million pretax write-down of a reinsurance recoverable by fronting carrier Trisura.

KBRA said that the reputation of those in the insurance value chain is likely to suffer short-term damage as various fronting insurers, reinsurers, cedants, brokers, and MGAs assess the full financial and operational impacts of recent events.

According to the KBRA report: “While reinsurers benefit from the volumes and diversity of business they can access by reinsuring fronting carriers, it has been increasingly difficult for fronts to obtain the amount of reinsurance in the form and at the cost desired. While productive relationships with reinsurers remain a critical success factor for the industry, the fronting industry has seen a distinct shift in their reinsurance panels toward more captives and unrated paper. With relatively more exposure to captives and unrated reinsurers, counterparty credit and collateral risk management becomes increasingly important to fronting carriers. There has also been a shift over the years to reinsurers increasingly requiring fronting carriers to retain exposure, which has spawned various risk-sharing strategies. One potential outcome of the Vesttoo matter could be that management teams reassess the type and extent of their usage of unrated and captive carriers.”

KBRA notes that recent negative events underscore the critical importance of effective enterprise risk management and could be positive catalysts for change.

Some broader mergers and acquisitions opportunities may emerge due to the sector’s structure, while some are already underway due to evolving strategies.

KBRA concluded that it believes the sector is well positioned to apply the lessons learned and potentially emerge as a stronger and more robust participant in the overall insurance market.