If you’re an independent agent working with captives, you've likely heard the term fronting carrier. That said, what does that really mean to your clients? Many agents aren’t familiar with fronting carriers and how they affect unexpected costs, compliance issues, and operational roadblocks.
Captive Coalition understands the relationship between captives and fronting carriers, knowing that when challenges arise. We’ve seen these questions come up again and again:
- What does a fronting carrier do?
- Why do captives need one?
- How does a captive know if they’ve picked the right fronting carrier (fronts)?
If these are questions you have, you aren’t alone.
We spoke with Anthony Ciofani, Captives Officer at Midwest Casualty, and Scott Barry, the Director of Underwriting at Captive Coalition, to help break this all down.
This article will explain how fronting carriers work, why they matter in a captive program, and the challenges fronts can present to captives. By the end, you’ll understand how fronts operate with the captive structure and convey the challenges they can pose to your clients.
What is a Fronting Carrier and Why Are They Necessary?
Captive insurance can already be challenging to learn. Then add the fronting carrier's role with the captive and learn about that relationship.
A fronting carrier is a licensed insurance company that allows the captive to operate legally.
Since captives are not licensed to issue policies in every state, they “rent” the fronting carrier’s paper for a fee, typically around 6-7% of the premium. This makes the captive compliant with regulations while allowing the business to retain control over its insurance.
Without a fronting carrier, a captive can’t provide statutory coverages like workers’ compensation, auto liability, or general liability. Some captives avoid using a front by writing only non-statutory coverages like cyber or professional liability, which severely limits the program’s flexibility.
Choosing the Right Fronting Carrier
It’s not safe to assume any carrier will do. Fronting carriers have different appetites, structures, and financial requirements.
What Captives Consider When Choosing a Fronting Carrier
- Financial Strength: The Carrier should have a solid A.M. Best rating for long-term stability.
- State Licensing: The carrier must be licensed in all states where coverage is needed.
- Risk Appetite: Not all carriers accept every industry or coverage type. Some avoid high-risk sectors like trucking or construction.
- Collateral Requirements: Some carriers demand large collateral reserves, tying up significant capital for clients.
- Service Quality: Some carriers require specific claim administrators, third-party administrators, or loss control vendors that may align with clients' needs.
Major Challenges Captives Face with Fronting Carriers
Even when the right fronting carrier is selected, captives still have their fair share of challenges. Here are the most common issues agents need to be aware of:
1. High Fronting Fees
Fronting carriers charge a fee for allowing captives to use their paper, typically around 6-7% of the premium. While this may seem small, it can add up over time.
2. Collateral Requirements
Many fronting carriers require captives to post collateral (20-30% of premium) to protect against unpaid claims. If the requirements are too high, cash flow can be restrictive, making the captive less financially feasible.
3. Policy Issuance and Compliance Delays
Compliance headaches can occur when some fronting carriers are slow to issue policies or require excessive documentation. If a carrier takes too long, it can disrupt the captive’s operations and frustrate clients.
4. Restrictive Coverage Appetite
Not all fronting carriers will accept every risk. Some refuse to cover high-risk industries, while others won't allow captives to write specific lines of business. If the agent doesn’t align the client’s risk profile with the carrier’s appetite, the captive may be limited in its effectiveness.
5. Service Quality Issues
Many fronting carriers mandate using specific third-party vendors for claims handling, loss control, and risk management. If these vendors underperform, it can increase costs and negatively impact the captive’s profitability.
What Happens if a Fronting Carrier Leaves?
One of the most considerable risks in a captive program is the possibility of a fronting carrier exiting the relationship. The captive has a limited time to find a replacement if this happens. The captive can be at risk.
Most fronting carriers are required to give at least a 90-day notice before leaving, though this depends on the agreement the front and the captive make. Many captives require six months or more to secure a new front. The longer the captive has been in operation, the easier it is to find a new front. However, newer captives with a limited history might struggle to find a replacement.
Agents need to be aware of this risk and ensure that their clients’ captives have contingency plans in place.
Negotiating Better Terms With a Fronting Carrier
While many fees and requirements are standard, there is room for negotiation, which is especially true for well-run captives with strong loss histories. Here are ways terms can be improved:
- Lower Fronting Fees: Larger programs can negotiate reduced fees based on premium volume.
- Flexible Collateral Arrangements: Some carriers allow phased collateral reductions as the captive matures.
- Service-Level Agreements: Setting clear expectations on policy issuance and claims handling can prevent service issues.
Best Practices for Managing the Fronting Carrier Relationship
A strong relationship must be maintained once a captive has a fronting carrier in place. Here’s how long-term success can happen:
- Frequent Communication: Regular check-ins prevent surprises and keep both parties aligned.
- Clear Expectations: Understanding what the carrier will and won’t do helps avoid misunderstandings.
- Proactive Risk Management: Safety programs reduce claims, improving the captive’s financial strength and bargaining power.
Setting Your Captive Clients Up for Long-Term Success
Many independent agents don’t fully understand how fronting carriers can impact captives. It’s important to know how fronting carriers operate, the challenges they can pose to captives, and implement strategies to avoid any major risks with clients.
Next, read our article on what lines of business work well for captives to see if your client would be a good fit.
Finally, to learn more about all things captive insurance, become a member of Captive Coalition for free to access webinars, tools, resources, and training to help your best clients.
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