What Is “Fronting” in Insurance? Demystifying This Common Practice

What is Fronting in Insurance?

Fronting refers to an arrangement where an admitted insurance carrier issues a policy to cover certain hard-to-insure risks, but then cedes most or all of the risk to a non-admitted carrier through a reinsurance agreement. The admitted carrier acts as the “fronting” company, allowing the non-admitted carrier to effectively write insurance without having the required licenses.

Why Do Insurers Use Fronting Arrangements?

There are a few key reasons fronting arrangements are used:

• To allow captive insurers, risk retention groups, or other alternative risk transfer mechanisms to efficiently write insurance coverage they wouldn’t otherwise be licensed to write directly
• To access an admitted insurance carrier’s licenses and approvals to write business in certain states or lines of insurance
• To obtain an admitted paper policy for clients when coverage can’t be placed directly with a non-admitted market
• The fronting insurer receives a fronting fee or commission for allowing their paper and licenses to be used. The underlying risk is passed to the captive, reinsurance front, or other entity through a fronting arrangement or fronting policy.

Fronting in Captive Insurance Structures

One common use of fronting is to allow captive insurers owned by corporations, groups, or high net worth individuals to indirectly write certain policies:

• The captive or parent entity bears the actual risk
• An admitted commercial carrier provides licenses and policy issuance through a fronting arrangement
• Premiums are subsequently ceded to the captive minus a fronting fee

This allows the captive to write policies regulated groups may not have licenses or approvals for directly. The arrangement provides policy issuance, claims handling, loss control and other services while the captive retains the underwriting profit or loss.

Other Fronting Arrangement Uses

In addition to captive insurance structures, fronting policies may provide solutions for:

• Risk retention groups covering liability risks for similar businesses or organizations
• Programs requiring an admitted paper where pooling mechanisms are prohibited for certain groups or risks
• Hard-to-place risks where no single domestic insurer has adequate capacity

As long as regulatory requirements are met, fronting gives insurers greater flexibility in covering complex, emerging or specialty risks on both a domestic and international basis.

The Takeaway

While fronting has faced criticism for potentially disguising true risk exposures or insurance sources, properly structured arrangements provide a regulated mechanism for accessing alternative capital and tailored coverages. Understanding fronting is key for insurers and buyers seeking innovative solutions for hard-to-place risks in sectors like cyber insurance, professional liability, construction and energy. As a licensed risk management mechanism, fronting creates opportunities while ensuring financial oversight and client suitability considerations.