Fronting

Summary of Fronting

Arrangement in which an insurance company issues a policy but transfers the risk to another insurer. This arrangement may arise when an insurer wishes to participate in a market where it is not admitted or where its policies may not be commercially acceptable. Under such circumstances, the insurer desiring to write the risk may ask an acceptable local insurer to write the policy for a fee, passing on the risk and premiums. Insurance companies are selective in issuing front policies, inasmuch as the issuing company stands before the world as responsible to respond for claims. As a practical matter, an insurer can be paid to have issued a front policy where it retains 10 percent or less of the face amount of the policy, reinsuring the remainder. The fronting company may derive a fee ranging from 2M to 30 percent out of the policy premium, depending upon the reliability of the reinsurer and the level of services (e.g., claims, salvage) to be performed.

(Main Author: William J. Miller)