The U.S. fronting market, where specialized carriers offer their financial strength rating, licensing and other services primarily to managing general agents (MGAs), has seen dramatic growth in recent years, from a premium size of about $4 billion in 2018 to a market now exceeding $12 billion, according to a newly released report by Conning.

Fronting companies act as issuing carriers, and in turn cede the majority of the premium and risk to reinsurers.

The growth is the result of several factors including growth in the underlying MGA market, strong rate trends and greater acceptance of MGAs utilizing the fronting model the report, “The Fronting Market: At an Inflection Point,” noted.

Access to the large volumes of premiums provided by this distribution channel is an attractive incentive to reinsurers.

The fronting market is at an inflection point, according to the Conning report.

“While near-term growth prospects remain favorable, this sector is facing several challenges,” the report stated.

The rapid growth seen in the last few years will slow, the report stated, due to the pressure of inflation on reinsurers, a tighter reinsurance market and reduced access to capital.

As a result, it is expected that consolidation among the more than 20 fronting markets will occur.

The oversaturated market highlights that despite the more than 1,000 MGAs, all the fronting options available are probably unnecessary.

“The fronting market has seen significant activity over the past 18 months, and we expect this is just the beginning of further change to come in this evolving market,” said Steve Webersen, a managing director of Insurance Research at Conning.

The report cites three developments that have changed the fronting market.

Substantial increases in reinsurance premiums suggest the likelihood of fronting companies retaining more risk.

In addition, reinsurers are expected to be more cautious of programs lacking history. Conning states that reinsurers can now grow with less risk by themselves.

Access to capital may become an issue for some fronting companies, leading to more sales transactions.

The reinsurance recoverable writeoff by fronting company Trisura has also received attention for the magnitude of the charge, indicating it may be necessary for the fronting market to reexamine their exposures and risk controls.