Ad Hoc Group Tackles Fronting Issue

By Caroline McDonald

An ad hoc group of captive specialists is seeking to remedy aproblem that stands in the way of a captive boomthe shortage offronting companies.

If the groups effort is successful, the problems of frontcompany scarcity and rising fronting commissions might by solved byyear end, 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,” he said. “Clearly there is still somefronting going on, but it is getting a lot more difficult” tofind.

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 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.”

But “there are a lot of constituents that have to be satisfied,”including regulators, rating agencies, chief financial officers andchief executive officers.

So far, he said, 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 that could be in place by the end of this year. Thebasic theory, he said, is that captives would be able to controltheir own fronting. “It is not that simple, but I think it isdoable,” he said.

Mr. Mead added: “I have to emphasize that fronting is not anissue for everybody. There are still a lot of [insurance] companiesdoing fronts, and a lot of [captives] happy with theirsituations.”

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

Reproduced from National Underwriter Edition, April 28, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.