Fronting

Fronting is the structure in which an insurer licensed in a territory, the fronting carrier, issues the policy and is solely liable to the insured, then cedes most of the risk, often all of it, to a reinsurer or to a group captive that lacks the local license. It rents out its license and its paper for a fronting fee, usually a percentage of premium. The best-known European case is recent. Since January 1, 2019, Lloyd's Insurance Company in Brussels has written the European Economic Area risks that Lloyd's syndicates could no longer write without a passport after Brexit, and it cedes them back in full to those syndicates through reinsurance. The textbook use is a multinational program, where a group wants its risks to sit in its captive while each subsidiary meets local compulsory insurance rules. The other is a reinsurer reaching a market where it is not admitted. In the United States, hybrid fronts have multiplied in recent years, pairing MGAs with reinsurers while keeping a small share of each risk. The fronting carrier still keeps the whole credit risk. If the reinsurer defaults, the claim is still owed to the insured, and the front pays it. The safety of the structure therefore rests on the reinsurer's solvency and on the security the front demands, collateral or a letter of credit, which keeps fronting on regulators' watch lists. People confuse it with a cut-through clause, which gives the insured direct recourse against the reinsurer. In UK motor insurance the same word means a fraud: listing a parent as main driver of a car a young driver actually uses.