A captive program can be the an effective way to manage risk and provide adequate coverage to its parent company or group owners. Sometimes, state laws do not allow captive insurance programs to issue insurance policies. In these instances a captive insurance company uses an admitted insurer to front the insurance program. Fronted companies can offer a wide range of services including risk prevention, underwriting, pricing, claims handling, accounting, policy services and reinsurance. Stable pricing and consistent coverage availability can be achieved from a long term partnership between the captive and fronted company.
Insurance companies benefit from fronting in several ways.
Fronting insurance programs generate more business to the insurance companies that would otherwise be written by another insurance entity. A fronting program which is adequately secured with reinsurance and financial guarantees should generate a higher rate of return on equity to the fronted company than the traditional insurance company. A significant risk for a fronted company is the credit risk of the captive. Credit risk is generated from the captives inability to meet its financial obligations from the business and financial risk. They include adverse loss experience, catastrophic loss or inadequate spread of risk.