Cyber Risk in Reinsurance
February 12, 2025
Organizational diversity enables individuals from diverse backgrounds, religions, communities, age groups, experiences, educational qualifications and so on to work on a common platform, striving hard towards achieving the goals and objectives of the organization within the shortest possible time frame. Management plays an essential role in managing organizational diversity: All individuals need to be treated […]
What is a Diversity Scorecard and Why it is Important Typically, organizations have what is known as a Balanced Scorecard for measuring and tracking outcomes against goals. By “keeping the score” on how well they have been doing on various measures related to strategy, policies, and other imperatives, organizations use metrics and KRAs or Key […]
The resume acts as a bridge between you and the prospective recruiter. Hence the importance of a resume can never be underestimated. So, to make the first impression, it is imperative that your resume stands out from the crowd first. It is up to you how do you want to be remembered by the hiring […]
Structured finance products have proliferated the financial markets. There are several derivative products that have been created with the sole intention of helping a company transfer its credit risk onto another company or group of investors who are willing to assume this risk. The most well-known and common structured finance product which enables companies to […]
A leader has got multidimensional traits in him which makes him appealing and effective in behavior. The following are the requisites to be present in a good leader: Physical appearance- A leader must have a pleasing appearance. Physique and health are very important for a good leader. Vision and foresight- A leader cannot maintain influence […]
The reinsurance industry has several complicated terminologies which are routinely used. This is because there are several concepts in the reinsurance industry that are different from the general insurance industry. The concept of fronting is one such concept. Fronting can be confusing to a layperson. This is because it is a complex arrangement. However, it has several benefits for companies who want to use their captive insurance companies to provide reinsurance.
In this article, we will have a closer look at what fronting is and what are the benefits of using fronting.
Fronting is an arrangement that defines the relationship between three entities.
Now, there are large corporate groups that have created their own captive insurance companies. However, such insurance companies may not be licensed to operate in all parts of the world.
For instance, an American conglomerate may have created a captive insurance company that is licensed to operate in all states of America. However, if they start operating in other countries such as Mexico or China, the insurance company may not have the required licenses. The management wants to insure their own risks. However, they cannot do so for legal issues.
In such cases, they use a third-party insurer for fronting. This means that they use a third-party commercial insurer who is licensed to provide insurance at that particular location. However, they do not want the commercial insurer to actually bear the risk. This is the reason that they immediately ask the commercial insurer to take out another reinsurance policy with their very own captive company.
This means that in essence, the captive reinsurance company is providing the insurance. The third-party commercial insurer has only been used as a front i.e. as a pass-through entity to transfer the risk to the captive reinsurance company in a legal manner.
The first step in a fronting arrangement is for the insured company to contact the captive insurance company with its insurance needs. The captive insurance company then contacts the various insurance companies that are licensed to provide the policy. This is done to obtain an economical price. The insurance company immediately signs an indemnity contract which transfers the risk back to the reinsurance captive company.
However, it needs to be understood that since the commercial insurance company has underwritten the risk, they cannot completely transfer it to the captive reinsurance company.
In case, the captive reinsurance company goes bankrupt, the commercial company will still be obligated to pay out the claims. Third-party insurance companies are aware that they are undertaking this additional risk. Hence, they do charge a premium for this risk and also make provisions to be able to repay the loss if the situation for making a claim does eventually arise.
It also needs to be understood that if a commercial insurance company ends up going bankrupt, then the premiums paid by the insured are lost and, in some jurisdictions, they may also be liable to pay even more premiums.
Also, legally when a claim comes in, the fronting insurance company cannot simply pass on the liability to the captive reinsurer. As per the process, they have to pay the claim within the agreed-upon timelines. Later, they can get the same claim reimbursed by the reinsurance company. Many fronting companies design the contract in such a way that the cash flow received by them is earlier as compared to their obligation to pay the claim. This helps them ensure that their cash flow situation is not negatively impacted.
Companies which act as a front in such arrangements are aware of the fact they are just lending their balance sheets to another company and obtaining a fee for the same. However, in many parts of the world, it is mandatory for fronting insurance companies to participate in risk sharing. Based on this, the types of fronting agreements can be divided into two.
The fact of the matter is that fronting is a widely used arrangement in the reinsurance industry. Even though the arrangement is complex and requires coordination by several parties, it is still preferred by many companies who have set up their own captive insurance companies and want to manage their own risk.
Your email address will not be published. Required fields are marked *