The presentation relates to the use of an authorized and authorized insurer to issue an insurance policy on behalf of a self-insured organization or a captive insurer without the intention of transferring any of the risks. An initial policy is a risk management technique in which an insurer underwrites a policy to cover a specific risk, but then transfers the risk to a reinsurer. Initial funding policies, which are a type of alternative risk transfer (ART), are the most used by large organizations. Because the reinsurer assumes all the risk of the policy, it maintains full control over the claims process.
Fronting is most often understood as when a transferor company (insurance company) underwrites a policy and transfers all risk to a reinsurer. In its most common form, a commercial insurance company (“parent company”), authorized in the state in which the risk to be insured is located, issues its policy to the insured. By using a shell company, the insured may be in a better position to deduct premium payments from insurance contracted through the parent company and, ultimately, through the captive one. The insured receives a policy from the parent company, but the risk covered by the program ultimately falls on the captive insurance company.
The difficulties that captive insurance companies have had in finding suitable first-line insurance companies at cost-effective rates are one of the biggest challenges facing the captive insurance industry today. Fronting has been defined as the use of an authorized and authorized insurer to issue an insurance policy on behalf of a self-insured organization or a captive insurer without the intention of transferring any risk.