Understanding Fronting in Risk Management: A Guide for Business Owners

As a business owner, are you familiar with “fronting?” Before you think it’s just another insurance jargon term, know that fronting can be advantageous to your organization’s risk management strategy. Let’s explore what it is, whether you should consider using it, and the potential benefits it could provide your organization for both property and casualty and employee benefit captives.

What is Fronting?

A fronting arrangement entails a licensed insurance carrier (the fronting company) providing coverage to another entity, one that cannot write coverage, where the insured retains the risk via a deductible and indemnity or by transferring it to a captive insurer through a reinsurance agreement.

To simplify the definition, fronting is a type of alternative risk transfer between two parties: 1) the company getting insured and 2) the insurer. An example would be a licensed, admitted commercial insurance company that issues a policy on behalf of a self-insured business without intending to take on the risk. The self-insured retains the risk through either an indemnity or reinsurance agreement.

A fronting arrangement can also be used for employee benefits captives. Various employee benefits, including medical, life, and disability insurance, as well as retiree medical and voluntary benefits, can be funded this way. A fronting arrangement allows a captive to navigate legal requirements and contractual obligations while using their own risk-bearing capabilities for employee benefits.

Some fronting arrangements include a third party—a reinsurer. For example, suppose a company is licensed to operate in a specific area but wants to work in an area not covered by its current license. In that case, the company can use a reinsurer, a third-party insurer licensed in the area where it wants to work.

While fronting is a complex term, an explanation of whether your business should consider this type of arrangement may help you decide if you need to delve deeper into understanding what a fronting arrangement entails. The following section covers the advantages of using a fronting arrangement. As you study them, think about whether they would benefit your company.

Why Use Fronting?

Alternative insurance programs allow an organization to fund its own risk, if capable. As with any alternative risk arrangement, whether fronting is a good fit for your organization depends on several factors. Let’s look at what you need to think about when deciding if the potential benefits are worthwhile for your business. Considerations include:

• Risk tolerance: your company’s risk tolerance in relation to the reward of potential cost savings if, as the insured, you take a long-term approach to your organization’s insurance program versus looking for a short-term fix for a current issue.
• Collateral requirements: collateral is an asset that a business uses as security. The asset must not have other claims against it or be promised to another entity. The insurance carrier will want collateral as protection against situations that might pose a risk to them. Putting up collateral, such as a letter of credit or trust financed by the captive’s investments, ensures money is available to pay any claims.
• Negotiation options: alternative risk platforms can provide broader coverages versus conventional insurance. A fronting company can take on risk where a business is not licensed to sell a certain product in a certain area. This can help your company’s organic growth.
• Claim management: the insured has more flexibility in claim resolution, including the ability to use known defense attorneys. You can use the legal counsel you are accustomed to, which provided successful outcomes in the past.
• Up-font costs and other coverages: the fronting company covers the costs of issuing the policy, which may be much less than costs associated with traditional insurance. Adding other lines of coverage may provide scalability. This is important to consider if you plan to grow your business.

Of course, fronting is not without its challenges. One issue with using a fronting arrangement is the availability of reinsurance in the current insurance market, especially for smaller captives composed of smaller businesses. These may have limited amounts of capital and be more dependent on reinsurance. The hard market can make finding a reinsurance company harder. A lack of fronting insurers is another hurdle. Getting the insurers to release funds can be a slow, arduous process.

As challenges form, the insurance industry continues to evolve, creating new solutions. Single-parent or cell captives and unbundling services are some new offerings being refined to overcome issues with a fronting arrangement.

As businesses continue to experience the rising costs of traditional insurance, they can look to alternative solutions that provide more control and stability to their program. Fronting is one option to consider.

Is Fronting the Right Choice for Your Company?

The bottom line is that a fronting arrangement offers an alternative approach to managing your organization’s insurance costs. It’s a sophisticated strategy that can provide cost savings and other benefits.

AssuredPartners has a team of professionals who can help you decide on the best risk management solution for your business. We can guide you through the decision-making process and the transition from conventional coverage to a non-traditional strategy. Reach out to us to discuss all your options.