Fronting carrier
A fronting carrier is a licensed, admitted insurer that issues policies on behalf of another party and then transfers most or all of the underlying risk to a reinsurer. It lends its license and paper for a fee while remaining legally responsible to policyholders.
Fronting lets an entity that cannot legally or practically issue policies in a given market, such as an MGA, a captive, or an unlicensed or unrated reinsurer, still bring a product to policyholders. The fronting carrier provides the regulatory license and financial rating, often called the paper, issues the policies, and charges a fronting fee that is usually a percentage of premium.
Behind the scenes, the fronting carrier cedes most or all of the risk to one or more reinsurers. Even so, the fronting company stays primarily liable to the insured and to regulators: if a reinsurer fails to pay, the fronting carrier must still honor claims. To manage that credit exposure, fronting carriers typically require collateral such as trust accounts or letters of credit.
For example, a captive or an MGA program may use a fronting carrier to satisfy a state's admitted-market requirements, while the program's reinsurers assume the loss exposure.
Fronting arrangements are common in program business and are one way risk reaches the reinsurance market, where reinsurers such as RiskCube Re can provide capacity for the underlying emerging and complex risks.
Definitions are educational and general, and specific contracts, endorsements, and state rules may modify them. For regulatory guidance, refer to the NAIC or the Insurance Information Institute.