Negotiating Fronting Fees
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Negotiating Fronting Fees

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Medical Expense Stop Loss insurance is a smart and economical way to lower costs and improve employee health insurance. ...

Medical Expense Stop Loss insurance is a smart and economical way to lower costs and improve employee health insurance.
Currently available only for employers with 50 or more insured employees.

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  • 1. ==== ====A great way to provide group health insurance to 50 or more employees!http://www.captiveinsurance.info/Health/health.html==== ====Whether you are negotiating a fronting fee with an insurance company for the first time, as youhave a "start up" captive insurance company, or you are looking to renegotiate a "renewal" captivecompany fronting fee, you are going to be in for the insurance education of a lifetime.The cost of "fronting" goes up on the very basis that there is a shortage of insurance companieswilling to "front." The insurance market losses companies like Quanta Capital, Alea, etc. and thusreduces the options available. Where are the new fronting insurance companies going to comefrom? Hurricanes Katrina, Rita, and Wilma have brought havoc to the property captives, where wesee fronting fees rising to 15%. The new Bermuda companies will acquire U.S. insurancecompany platforms and will be the "fronting" insurers of the future.Owners of captive insurance companies must realize that "fronting" insurance companies need tobe approached on various levels of management, with preferably senior management getting intothe decision making process early on in the negotiations.Underwriting Departments are playing a greater role in captive fronting, with the financialdepartments looking closely at the credit risk of the parent transaction. For instance, several yearsago, construction companies would capitalize captive insurance companies just to insure the self-insurance deductible under their Owner Contractor Insurance programs. Now "fronting" insurancecompanies are examining the financial statements of these same construction companies to makesure they can sustain the ownership of the captive insurance companies. Interestingly enough,captive owners need to continue to monitor the financial statement of their fronting insurer, and tobe on top of any potential rating downgrades by the rating organizations. Insurance companymanagement historically has had a tendency of "failure to disclose" negative results.Fronting insurance companies are playing a greater role in the selection of the domicile for thecaptive insurance company. Domestic versus offshore domicile continues to be debated. Even onshore domiciles like New York State, with its 35 captive insurance companies, are trying to expandthe captive concept by reducing the threshold, $100 million parent net worth to $25 million parentnet worth captives. More advertising needs to be injected into the New York captive initiative.Most of the experienced, fronting insurance companies, have shown the ability and expertise to"front" captives from Vermont domiciles to Hawaiian domiciles, and from Barbados to Bermuda.The focus has been to continually drive down overhead expenses and those domiciles doing thisare attracting all the new captive formations.Interestingly enough, domestic captive domiciles did not lead in 2005 formations, with Bermudaand the Cayman Islands accounting for 134 captive formations. Vermont with 37 captiveformations led the United States.
  • 2. Fronting insurance company pricing for the risks going into captives are getting a closer look bythe actuarial profession. Captive owners have come to recognize they need their own actuarialsupport when disagreeing with the fronting insurance companys assessments of what is thecorrect price for the risk. Whether you are a residential contractor in California or a nursery homein Florida, your captive requires adequate pricing executed by the fronting insurer. We are going tosee more litigation in the future between captive owners and their front insurance companies, asthe disagreements over pricing continue to persist on each renewal.Captive owners want their front insurance companies to come up with independent prices for eachrisk, and that concept continues to be a problem with the front company. When it is admitted, andhas to use their filed rates. Insurance company market conduct reports are going to expose frontcarriers that they are violating their rate filings when writing primary insurance products which arereinsured back to the captive insurance company.The more mature captive insurance company, with over five years of financial history, needs tohave a committee of its Board of Directors look closely into the entire costing structure of thefronting fee. This would be a great excuse for members of the captive board to understand thisimportant transactional cost.What are the detailed components of the fronting fee? How are they monitored by the captiveowner? When was the last time a new fronting company was asked to quote on the captive? Oncethe captive board gets this training, the Boards will not be "rubber stamps" and exercise morejudgment at insurance decision making.More and more mature captives are looking to write their Directors and Officers Liability Insuranceinto their captive. The front insurance company writes the traditional D and O form, and that risk inthen ceded back to the captive, acting as reinsurer. The exclusions in the traditional D and Opolicy are then covered by a direct procurement policy from the captive, eliminating the need forthe front. The pricing for the direct procurement policy should be controlled by the owner of thecaptive. In some aspects, a captive writing direct insurance policies in the United States shouldapply for an A.M. Bests rating. If we remember captives are a long time investment and by gettingan "A" rating from Bests, the captive becomes a substantial asset.Reciprocity among captive owners can be another way of eliminating the "fronting" fee. Eachowner uses the "A" rated captive for each others risks, and purchases a sophisticated reinsuranceprogram behind both captive insurance companies. When fronting fees approach double digits, itis necessary for captive owners to seek alternatives to "fronts." Creative solutions need to beimplemented, and captive company budgets need to have the financial resources to explorealternatives.Finding "fronts" for Contractors Pollution Liability Insurance is another area that is gettingsignificant attention. General contractors, residential or commercial, trade contractors, carpentryand plumbing, specialty contractors, foundation and pipeline, and remediation contractors, are allcandidates for captives, and in the early years require "fronts." Captives can substantially reducethe insurance costs of traditional pollution coverage for contractors, especially when layering ofpolicy limits is introduced above the captive retention. Customary pricing above the captiveretention follows the simplistic approach that the lower liability layers are priced higher than the
  • 3. upper layers, again giving the captive owner a "pricing" discount.The identification of the "fronting" carriers has not changed dramatically in the last few years:1.AIG2.ACE3.Old Republic4.Zurich5.Liberty Mutual6.Discover Re7.Chubb8.Hartford9.ArchThe negotiating process with each of these carriers has always been a challenge for captiveowners. Insurance company "fronts" are a dynamic group, and with people constantly changingpositions, requires that you pay significant attention to your fronting carrier to continually providefavorable relationships and eliminate misunderstandings. When was the last time you asked yourfronting carrier, how is my program going rather than react to their letter saying they are going tocancel your "fronting" relationship because they are returning from that particular insuranceproduct line.There have been a number of studies on what the "fronting fee" includes, or should include. Theamount of these fees keep changing but the overall concept remains the same. Focus andconcentrated efforts are required to keep this "fee" economically effective.Among the recent "fronting fees" the following is included:1.State Premium Taxes (not negotiable);2.Federal Excise Taxes (not negotiable);3.Government schemes (not negotiable, but try and get how they are arrived at);4.TRIA charges (usually not negotiable);5.Aggregate protection (negotiable, look at the concept of purchasing this yourself from outsidethe structure); and6.Profit margin for carrier/fronter (negotiable).
  • 4. If loss ratios are attractively low for your captive insurance company, make every effort to obtain alower "fronting fee." Insurance carriers are always seeking low loss ratio business even as a"front." If you can, try to influence the decision maker. Many "fronting fees" get renewed as iswhen they are comparatively high in mature, and it is in the carriers interest to renew as isbecause there is little additional costs in doing renewals. It is the "lifeblood" of the insurancecompany.On the basis of regulatory and rating agency fear, "fronting" carriers have made a conscious effortto require and substantially increase the collateral requirements they are asking for from captiveowners. This is an area of negotiation and as many Agent Owned Captive Insurance CompanyOwners have found out, too late, over collateralized programs lead to the inability of the agent tofund the letter of credit and therefore the "front" cancels the program.Captive Owners need to know that over-funded collateral is another way a "front" company canaccess additional capital for growth. You need to understand the true components of the collateralrequired:1.Loss Reserves (Schedule F - loss reserves plus unearned premium reserves and Incurred ButNot Reported losses) ... IBNR deserves the most attention since these are estimates, and doesthe Captive Owner want to pay for an independent actuarial study for the loss payout pattern, andfull development.2.Many "front" companies want funding that would include funding the letter of credit equal to highloss ratios, this is despite the fact they had set the pricing on the "fronted" policy. Owners need tohave the expertise to challenge the methodology of the pricing.In conclusion, "fronting" insurance companies provide "licensed paper," which is asset value; theyprovide regulatory compliance and finally support services. Remember if fronting fees are greaterthan 5%, and mostly in the 6-10% range. When going over 10%, it is imperative that you look foranother option.About this AuthorAndrew J. Barile, MBA, CPCUPresident / CEOP.O. Box 9580 • Rancho Santa Fe, CA 92067abarile@abarileconsult.comTel: 858-759-5039 • Cell: 619-507-0354 • Fax: 858-759-8436http://www.abarileconsult.comArticle Source:http://EzineArticles.com/?expert=Andrew_Barile
  • 5. ==== ====A great way to provide group health insurance to 50 or more employees!http://www.captiveinsurance.info/Health/health.html==== ====