Ad Hoc Group Tackles Fronting

By Caroline McDonald

NU Online News Service, April 17, 4:07 p.m.EST? A surging shortage of fronting insurers, accompanyingthe boom in new captive insurers, has provoked an ad hoc group ofcaptive specialists to seek a remedy, an industry expertreported.

If their effort is successful the problem of front companyscarcity and rising fronting commissions might by solved by yearend, said Michael R. Mead, president of M.R. Mead & Company,LLC, a consulting intermediary in Chicago.

Mr. Mead, a past chairman of the Captive Insurance CompaniesAssociation, said the effort to find a solution to the frontingshortage involves a group of captive experts.

"Fronting is the issue that still remains high on everyone'slist, if not at the top," Mr. Mead said. "Clearly there is stillsome fronting going on but it is getting a lot more difficult."

Fronting is an agreement by an insurer to issue a policy onbehalf of a captive insurer. Typically the front would write therisk for a location where it is licensed but the captive is not.The captive would then take the entire risk.

Mr. Mead, who is currently conducting CICA's fronting survey,said results of the study have not yet been released but thatfronting continues to be identified as a problem by thosesurveyed.

Mr. Mead revealed he has been involved in a project for severalmonths that may "provide some form of a solution to the frontingdilemmas."

At this point, "I can say that there are a group of members ofCICA who have talked to me about coming up with a solution to theirperception to a reduced number of carriers doing fronting, and intheir view, the onerous requirements of some of these carriers," hesaid.

Mr. Mead said he is working with several insurers already inexistence "that don't do [fronting] now."

However, he said, "There are a lot of constituents that have tobe satisfied," including regulators, rating agencies, chieffinancial officers and chief executive officers.

He said so far two attorneys, an actuary, a former insurancecompany CEO, "a half-dozen members of CICA and a half-dozen peopleoutside of CICA with similar issues" are involved in structuring abusiness plan which could be in place by the end of this year.

He said the basic theory is that captives would be able tocontrol their own fronting. "It is not that simple but I think itis doable," he said.

Mr. Mead added that, "I have to emphasize that fronting is notan issue for everybody, there are still a lot of companies doingfronts, and a lot of companies happy with their situation."

Whether or not a company can find a front, he said, isn't amatter of the size of the company, but "what we call in theinsurance business 'pig iron under water.'"

When pig iron is under water, he explained, it has "no chance ofburning. So any risk today that is pig iron under water [a saferisk] has no problems."

Underwriters in the current market "don't have to take on risksthat aren't safe, he said, "and why would they," he asked.

"There just isn't enough competition at the moment, and so we'retrying to inject a little competition," Mr. Mead said.