FRONTING BENEFITS AND DRAWBACKS
Program administrators are turning to fronted-carrier relationships for choice, control and more
By Elisabeth Boone, CPCU
Many program administrators have seen capacity restricted because of hardening market conditions. As a result, some are entering into relationships with so-called fronted carriers and are finding this approach to be a valuable enhancement to their business.
“There are many reasons why the fronting model has become so popular and why a lot of new participants have entered the space,” says Tom Gillingham, managing director of NFP and also a Target Markets Program Administrators Association (TMPAA) advisory board member. “Program business continues to grow at a brisk pace and continues to outgrow the general property/casualty marketplace.
“There are many opportunities,” he notes. “Fronting gives program administrators the potential to have more control over the underwriting and administration of their programs.
“[Fronted] carriers are creating independence and choice that weren’t available previously.”
Arden Insurance Services
“But it does have drawbacks, which are often found in the contractual relationships that exist between the MGA, the front, and risk-bearing parties,” Gillingham says. “Complications may arise because there can be multiple reinsurers offering unique terms to the front, and there are also bordereaux reporting procedures that can be more complex than with a traditional issuing carrier.
“The traditional fronting carrier is not in the risk-taking business,” he adds. “It gets a fee for lending its balance sheet and its A.M. Best rating to the program administrator, but it’s never going to accept contractual responsibility for paying a claim that isn’t covered by participating reinsurers.
“Some of the hybrid models will take up to 20% of the risk on a quota share basis,” Gillingham explains. “In doing so, they tend to be able to induce strong reinsurance participation, because it signifies that they’re doing due diligence, that they have controls in place, and that they’re willing to put their own skin in the game. That’s one way the hybrids compete among themselves.
“Some of the newer hybrid models have a reinsurance panel to which the program administrator can bring its business,” he continues. “In other instances, the program administrator has to hire a reinsurance broker and put the deal together themselves, package it, and present it to the fronting carrier.”
What do program administrators need to bring to the table in a fronting arrangement? “Data, expertise, and generally a reinsurance broker relationship,” Gillingham responds. “They also need to have their own system. If you have an existing or preferred reinsurance partner that you can bring to the table, that can also be helpful to a successful placement.
“As for classes of business, carriers are generally agnostic,” he explains. “They’re more interested in data; and because as much as 100% of the risk is being reinsured, they don’t tend to be as concerned about the class of business.”
According to Desmond Bohan, CPCU, ARe, executive vice president of BMS Re, “The hardening market has certainly played a big part in the increased use of fronting, and the reinsurance community has awakened to the MGA market, not only because it makes up a substantial part of the marketplace, but also because of how profitable it’s been.”
Bohan points out that fronting involves a dual approach. “The first piece is MGAs or other program administrators partnering with fronted carriers or hybrids,” he explains, “and the second piece is that the partner connects with multiple reinsurers.”
What happens when a claim comes in? “Typically, the carrier will pay the claim, and the reinsurers reimburse the carrier,” Bohan says. “With multiple reinsurers, the reimbursement may be allocated in different percentages.”
He points out that there are differences among fronting programs. “A major difference is whether the program administrator or MGA is an active risk taker in the program,” Bohan says.
“The true fronted programs have plenty of reinsurance support, but many reinsurers want the carriers to have some skin in the game,” he explains. “When they’re able to do that, the interests are aligned. And that opens up a lot more doors in the reinsurance community because they can attain a comfort level.
“Another factor is whether the fronting carrier is auditing the MGA on a regular basis,” Bohan adds. “Is a referral underwriter in place to handle larger or tougher accounts? It’s a positive for the reinsurer to know that there’s some extra oversight or underwriting talent at the fronted carrier.”
What does a program administrator need to bring to the table in a fronting arrangement? “First the MGA needs to bring a particular niche to the table, along with serious underwriting expertise for that niche,” Bohan says. “Beyond that, it’s important that the MGA or program administrator has control over their data. They need to be able to slice it and dice it to a granular level. They need to showcase what makes their book of business different from those of their competitors, and data is the only way they can do that.”
Fronting played an important role in the early days of one program administrator. “I founded Arden Programs five years ago, and I found a big carrier that took most of the risk,” explains Brian Cohen, CEO of Arden Insurance Services. “As capacity considerations and reinsurance costs rose, a percentage was imposed on me. I was getting no benefit from the arrangement.
“Fronting gives program administrators the potential to have more control over the underwriting and administration of their programs.”
“I discovered a fronted carrier that would allow me to create my own reinsurance panel and decrease our costs,” he continues. “This arrangement gave me control of my own destiny, because it allows me to build direct relationships with reinsurers. In a capacity-constrained market, having those direct relationships gives you an advantage.
“I got the capacity I needed,” Cohen recalls. “I made a lot of mistakes, but it was a valuable education for me.”
He adds, “Fronted carriers are creating independence and choice that weren’t available previously.” Asked to describe the difference between partnering with a fronted carrier and a traditional program carrier, he provides this analogy: “The fronted relationship is à la carte, while the program carrier relationship is like a prix fixe meal. Both have their positives and negatives.”
Editor’s note: This year’s Target Markets Program Administrators Association Annual Summit in October will address this topic more deeply in a session titled, “Anatomy of a Fronted Program—How Program Administrators Can Leverage Expanding Fronting Options.” The session will show how to create a panel of reinsurers to support a specific program and will offer key insights to help attendees understand the fronting process and avoid potential pitfalls.
Elisabeth Boone, CPCU, is a freelance journalist based in St. Louis, Missouri.