Why Is a Fronting Arrangement Used?

Why Do Captive Insurers Use Fronting Arrangements? Fronting arrangements allow captives to comply with financial responsibility laws imposed by many states that require evidence of coverage written by an admitted insurer, such as for auto liability and workers compensation insurance.

What is a fronting arrangement?

Fronting — the use of a licensed, admitted insurer to issue an insurance policy on behalf of a self-insured organization or captive insurer without the intention of transferring any of the risk. The risk of loss is retained by the self-insured or captive insurer with an indemnity or reinsurance agreement.

How does fronting insurance work?

A fronting policy is a risk management mechanism in which an insurer underwrites a policy to cover a specific risk or a set of risks, then cedes the risk(s) to a reinsurer. ... Fronting policies allow insurance companies to dabble in new areas of business, without taking in the typical risks of doing so.