Fronting carrier

A fronting carrier is a licensed insurer that issues a policy and then passes most or all of the risk to reinsurers or other capital providers.

The fronting carrier holds the regulatory licences and the financial strength rating that a policyholder, lender or regulator requires. It writes the policy in its own name, then cedes most of the risk to reinsurers or other risk-bearing capital through a reinsurance agreement, keeping only a small share and earning a fee for lending its paper.

The arrangement exists because the party with the underwriting skill or the capital often lacks the licence or the rating. A managing general agent, a captive or a new startup can build a book of business but cannot issue policies alone. The hard part is that the fronting carrier remains legally liable to the policyholder if its reinsurers fail to pay, so it must judge counterparty credit and oversee the underwriting it does not perform.

In insurance technology, fronting is the route by which many new underwriters reach the market. The carrier relies on data feeds, audits and reporting systems to monitor the delegated business. Newer offerings blend a fronting carrier's paper with its own capital, giving agencies more flexible capacity.

Written by Insurtech Daily.