Fronting partnerships with captives
The recent boom in new captives could lead to lasting partnerships with fronting companies that fill a very real and specific need on Bermuda.
According to Jonathan Reiss, chief executive of Concert, Bermuda-based companies need fronting because, whether they’re commercial insurance or reinsurance or captives, a significant reason they’re here is because Bermuda has a very effective regulatory environment.
“We have appropriate regulations for high-profile reinsurance companies and those regulations are aligned with Solvency II,” Reiss told Captive International. “But at the same time, we’ve been able to preserve the efficiency of our captive sector. Captives do not need to be regulated, or should not be regulated, to the same level as commercial insurance or reinsurance.”
Reiss said that Bermuda has done a very good job of preserving appropriate regulation for the captive industry as well as creating enhanced regulations where needed for the commercial sector. However, being regulated in Bermuda doesn’t give you the right to issue policies in other jurisdictions, so unless you want to be subject to the regulations in those other jurisdictions you partner with a fronting provider.
Many commercial insurance companies are prepared to expand their footprint, so they don’t need fronting, but captives don’t want to do that. As Reiss put it, captives are a good tool for a corporation to use for risk management and risk financing, but most captive owners are not insurance industry organisations and they don’t want to be in the insurance industry—they want to use effective risk management without creating insurance infrastructure.
So, what they do for their Bermuda captive is they hire an external insurance manager. This gets them out of having to manage their captive, because they outsource that but they still have the problem that they can’t issue policies unless they have a fronting partner. And that’s where Concert comes in and where there’s a tremendous synergy between an insurance manager and a fronting company.
“All the other large insurance managers are owned by large brokers, which don’t want to form their own fronting businesses, because then they’d be competing with their clients—their main product is broking, so they would have issues if they started to launch insurance entities, there would be conflicts of interest issues,” said Reiss.
SRS assisted in the creation of Concert but Concert is not owned in any way by SRS and has its own management team, Reiss pointed out.
Concert was formed because there was a ‘screaming need’ for it from captive clients, he said.
Most fronting capacity in the past wasn’t provided by dedicated fronting companies. It was provided by large insurance companies that do fronting but for which fronting is not a vital part of their business. There’s been a wave of M&A over the past decade, so, a lot of them have consolidated, and their minimum deal sizes are now very large. If you’re a captive owner starting out then your captive may be quite small, so those big insurers won’t even look at the captive.
According to Reiss, over the last five years there’s been a lot of new fronting companies formed, but most were small and none of them focus on captives. Instead, they’re more focused on insurtechs and other managing general agents, which can be a tricky business.
“The big reason why Concert was formed was to serve the under-served, particularly with respect to captives,” said Reiss. “And I’m getting a lot of calls from captives with unusual or almost unplaceable risks to cover— which is what makes them interesting. Some of the best opportunities can be the most off-the-chart circumstances and risks. This has been true for the captive industry generally.”
He concluded: “The captive industry was built around self-insuring what the commercial market was unwilling to cover or was mispricing. Plus, we’re in a hard market cycle and there tend to be many more captive formations in a hard market cycle. Concert is willing to be flexible with regard to minimum deal size—we’re looking for long-term relationships.”