NU Online News Service, March 9, 3:24 p.m.EDT

ORLANDO, FLA.--For the secondstraight year, captive owners said securing collateral from banksto satisfy their fronting companies is their top concern, a surveyby the Captive Insurance Companies Association has revealed.

The findings were presented here at CICA's 38th AnnualInternational Conference.

A captive often must secure a licensed primary insurance companyto serve as its "front" in a certain state, which issues a policyand then reinsures the vast majority of that exposure with thecaptive.

Since the fronting company is technically still on the hook forclaims, even though it passed almost all of the risk onto thecaptive, the front requires collateral--often in the form of aletter of credit from a bank--to guarantee reimbursement of thefront's costs.

In past years, particularly during hard markets, captive ownerscomplained about the cost of fronting, or finding fronts at anyprice. But with the precarious financial state of many banks thesedays, finding collateral to satisfy fronts has become the biggerproblem for captives.

"I think there is still unhappiness with fronting, but it's notthe primary issue any more," said Michael Mead, who has spearheadedthe CICA survey and coordinated a panel discussion of theresults.

The survey panel pointed out that one insurer in particular isspecifying which banks they will and will not accept collateralfrom. "That's huge," Mr. Mead told National Underwriter."If you say to a big corporation, you have to change your bankingrelationship for your captive, that's a big deal."

The survey this year, found collateral was cited as the captivestop problem by 27 percent of respondents, compared with 22 percentlast year. In 2008 service issues were the top concern for 36percent.

Other top concerns this year were regulatory issues (16percent), policyholder retention/growth (16 percent), with tax,fronting, and expanded utilization all at 7 percent.

In this year's survey, 93 percent of respondents said collateralwas required, compared to 85 percent the previous year.

When asked what kind of collateral was required, 76 percent saidletters of credit; 40 percent said trust accounts; and 28 percentsaid cash, with 8 percent naming parental guarantee. (More than onekind of collateral could be selected.)

Among some of the other survey highlights:

o Eighty-five percent of respondents listed admitted paper asone of their primary reasons for using a fronting carrier, withregulatory compliance as the next highest reason at 46 percent.

o One-hundred percent of respondents rated the overall level ofimportance of fronting to their captive as either "very important"or "important," while 78 percent listed having an A-rated frontingcompany as "very important."

o Eighty-nine percent of respondents characterized the price offronting as "reasonable," while 11 percent called it"expensive."

o Sixty-three percent characterized the value of their frontingrelationship as "excellent," with the other 37 percent listing itas "moderate." No one rated the value as "low."

o Forty-eight percent of respondents reported no change in thecost of fronting from the prior year, while 30 percent reported anincrease in costs of less than 10 percent and 20 percent reported adecrease.

o 24 percent of respondents said they considered the price oftheir reinsurance to be "expensive," 67 percent reported it as"reasonable," and 9 percent as "inexpensive."

o 19 percent of respondents said their reinsurance costs are thesame as the prior year, with 43 percent reporting an increase and38 percent reporting a decrease.

o A majority (53 percent) of respondents reported investmentyields of 2-to-3 percent, with another 13 percent reportinginvestment yields in the 4-to-5 percent range. Twenty-two percentof respondents reported yields of zero-to-1 percent, but no onereported less than zero percent.

Respondents reported using the following fronting carriers forP&C coverage: Chartis/Lexington (37 percent), ACE and Zurich(18.5 percent each), Liberty Mutual (11 percent). Discover Re, OldRepublic, and Chubb were all in single digits, with 37 percent ofrespondents also listing "other." (Some respondents use more thanone fronting carrier.)

The survey was drafted and approved by a CICA committee and wasconducted by the independent consulting firm of Veris Consulting,LLC, of Reston, Va.