An increasing number of companies are using a fronting company as part of their captive insurance program, a new survey has found.

The Captive Insurance Companies Association (CICA) Market Study attributes the increase in fronting activity to an increase in captives that are less than a year old.

CICA said that exactly half of participants surveyed for this year’s market study now say they use a fronting company.

The group also cites an increase in selective use of fronting, noting that nearly two-thirds of survey participants reported using fronting “only for covers where the benefit of rated, admitted paper, or another compelling reason, outweighed the cost.”

The CICA survey, which covered overall captive markets, as well as fronting issues, found that captives continue to explore placing employee benefits coverage in their captives and that cyber liability is one of the new coverages that captives are adding.

Participants identified the three biggest challenges in owning a captive as retention/growth/expanded utilization (20.6 percent); regulatory issues, including Dodd Frank/NRRA and Solvency II (17.6 percent); and collateral (11.8 percent).

Survey participants reported using four companies to differing degrees to meet both their property/casualty and employee benefits fronting needs.

Slightly more than a quarter reported that they marketed some portion of their captive insurance program this year. Most survey participants reported that they determine when to market their fronting programs on a reactive (service issues, price increases, changes in personnel, etc.) rather than proactive (good governance) basis.

The survey also found captives are pleased with their fronting relationships. Ninety-seven percent perceive the value of their fronting relationship as excellent or moderate and 87.9 percent perceive the price as reasonable or inexpensive.

In most fronting situations, a commercial insurance company (the fronting company) licensed in the state where a risk is located, issues a policy to the insured. Using reinsurance that risk is then transferred from the fronting company to the captive insurer. The result is that the insured obtains a policy issued on the paper of the commercial insurance company (which charges a fee) but the captive insurance company in effect assumes the financial risk.

Other findings from the CICA Market Study include:

• For the majority of survey participants, fronting costs remained unchanged over the prior year, with some reporting modest increases of less than 5 percent. The survey participants attributed the increases to tighter insurance market conditions, increased reinsurance costs at fronting carriers and the minimum charges established by carriers for fronting services.

• The tighter market conditions with respect to fronting were more pronounced for those survey participants that purchase reinsurance. Nearly 50 percent of them experienced some increase in costs over the prior year. Most of these survey participants reported marketing their program, increasing the retention in their captive or raising the attachment point for their reinsurance program as strategies used to mitigate some of the cost increases.

• Captives continue to consider adding employee benefits coverage with 25 percent reporting that they will likely or possibly place medical stop loss in their captive in the next three years; 22.1 percent that they will likely or possibly place disability benefits in their captive in the next three years; and 20.6 percent that they will likely or possibly place accident and health in their captive in the next three years.

• There is a small sign of expanded utilization as a few survey participants reported cyber liability as an “other coverage” being placed in their captives, most likely because of a lack of availability in the commercial insurance market.

About the Survey

A majority of respondents represented single parent captives (63%), followed by segregated cell captives 17%), risk retention groups (13%), association captives (6%) and agency captives (1%). 79% of respondents reported being domiciled in a U.S. jurisdiction, with 21% domiciled off-shore. Fifty-one percent of respondents have been in existence for 10 or more years, 29% in existence for 6-10 years, 14% in existence for 1-5 years, and 6% in existence for less than one year.

Survey participants were solicited through communications from CICA and through the collaborative efforts of a number of captive domicile trade associations. Veris Consulting of Reston, Va. compiled the results

Great American Alternative Markets and Willis Captive Consulting helped fund the survey.

Source: CICA