A fronting agreement is created usually when an unlicensed insurer, referred to as a non-admitted insurer contracts with a license insurer to issue a policy in order to be in compliance with regulatory laws and regulations of a particular state or country.
How this all plays out is that the fronting insurance company which is licensed in that state or country, contracts with the unlicensed, non-admitted insurer to do all the preliminary filings and certifications for that state or country. Then the fronting company immediately re-insures 90% to 100% of the risk to the non-admitted insurer. This fronting process has been existence for well over 100 years but it does give the appearance of behind-the-scenes backdoor dealing. Sometimes it looks like the unlicensed insurer is just trying to pull fast one on the state regulators. In the current economic global unrest these fronting transactions are coming under more scrutiny.
A few years back Congress passed the Liability Risk Retention Act and that has opened the door for unlicensed carriers to meet the regulatory filing and certification process on the front end without having Fronting Agreements. It makes for a more transparent process versus getting a licensed carrier upfront to appear to be on the front lines when really the unlicensed carrier is 100% insuring the risk. Fronting is still legal and is still used in all 50 states and in many countries.
As a business owner it would be prudent to know the contractual relationships behind the scenes of the insurance policies you are purchasing. Having a policy with the fronting carrier that is a brand name and well-known but whereby 100% of the risk has been transferred to a non-admitted unlicensed insurance carrier might lead to insolvency issues come claim time for you.
There can be some advantages for you as the insured, for the fronting insurer and for the unlicensed non-admitted insurer.
- For you as the insured this type of fronting arrangement usually is done in high-risk industries or high-risk exposures to loss. Thus the premiums from fronting arrangements tend to be less than policies purchased directly from the carrier.
- For the fronting insurance carrier this can be an advantage in that they might be able to enter tougher market arenas without having to jump in with 100% of the risk. Even if the fronting carrier re-insures 100% of the risk they still are entitled to a fee for their services.
- Finally, for the unlicensed non-admitted insurer whose desire is to write policies for a class of business with up to 90% of the risk on their books, having a fronting carrier to help them in regulatory compliance opens up new doors and markets for them to make a profit.
Fronting agreements have their advantages and their disadvantages and as a business owner it would be prudent to know what type of arrangement you are under in your insurance program. Fronting agreements can be advantageous if used properly but they also can be an opportunity for fraud if used incorrectly.