In this article, we continue our discussion about fronting arrangements. In our previous post, we focused on the relationship between fronting and fronted carriers, including the benefits of this type of relationship, the risks associated with it, and the governing regulations. However, fronting might include more than just these two parties. Another party that might be motivated to enter into a fronting arrangement is a managing general agent or MGA.
If an insurance or reinsurance contract does not transfer risk, it falls under the principle of deposit accounting. Under this principle premium is not recorded as income and is instead listed as an asset, which has a direct impact on the company’s leverage. In order to insure that reinsurance is applied towards surplus relief, it is important to examine the contract to see if both timing and underwriting risk have been transferred.
The early termination of a reinsurance contract is known as commutation. It releases the reinsurer of its present and future obligations under the original reinsurance agreement for a negotiated consideration as a complete and final settlement. Why commute and how … Continued
Reinsurance agreements must contain the element of risk transfer where the reinsurer assumes significant insurance risk and may realize a significant loss from the transaction. However, there is an exception to these rules. In the following example, we demonstrate the “substantially all” exception to the essential elements of risk transfer.
Fronting can be defined as an alternative way of entering markets and growing premium, a valid tool to be used for the benefit of both an insurer who needs the front and an insurer willing to be the front for the right compensation.