The insurance company itself doesn't pay any of the claims a customer makes. Advance policies allow insurance companies to venture into new areas of business, without assuming the typical risks of doing so. The main purpose of initial insurance is to allow the captive company or organization to issue policies in states where it is not licensed. The other purposes are to comply with insurance regulations and to give captives access to other services, such as claims management and the ability to transfer excessive risks, in a cost-effective manner.
For the insurer that provides the paper as the front side, the front side can generate revenue. It gives the company the opportunity to benefit from the initial fees without assuming substantial risk, but rather lending its role and, to a certain extent, its capital. Fronting can be defined as an alternative way of entering markets and increasing premiums, a valid tool that can be used both for the benefit of an insurer that needs the front and of an insurer that is willing to be the first to obtain adequate compensation. The leverage granted to the main insurer or the health problems of a major insurer can have a negative impact on the business.
The captive hires the main insurance company, which issues an insurance policy on paper with the main company's letterhead. The reinsurer links its product to the main insurer, so that there is a concentration of risk and there may be no alternative shell insurers.