Esteban Carranza-Kopper

Abstract

During the past decades, numerous discussions have emerged regarding fronting arrangements. Generally, a fronting arrangement is considered an alternative risk transfer method in which an insurer licensed in a particular jurisdiction (the fronting insurer) issues a policy covering local risks, but cedes all or nearly all of those risks to an unlicensed reinsurer, which typically assumes responsibility for administering related claims. In exchange for its services, the fronting company usually receives a small percentage of the premium. Thus, while the fronting company appears to the world to be the insurer, it has in reality transferred most or all of the coverage risk and claim-handling obligations to the reinsurer. Debate surrounding this practice has focused on whether fronting arrangements serve as a means to circumvent state statutes, whether they are beneficial or detrimental from the perspectives of policyholders, regulators, or the industry, and whether the practice should be banned or further regulated. As examined in this article, the National Association of Insurance Commissioners (NAIC) has discussed potential regulatory responses, some jurisdictions have enacted statutory provisions addressing fronting, and courts have recently issued decisions worthy of consideration. In light of these issues, this article provides a thorough analysis of fronting arrangements, the motivations for companies to use them, their negative aspects and risks, and the regulatory actions, statutes, and case law that have emerged in response.

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