Magazine article Risk Management

Advisory Committee Examines Fronting Issue

Magazine article Risk Management

Advisory Committee Examines Fronting Issue

Article excerpt

by Tom johnson At the fronting working group hearing at the National Association of insurance Commissioners' winter meeting in Louisville, KY, Patrick Foley, vice president and associate general counsel of American International Group Inc., testified to regulators that their proposed model act was "like trying to shoot a fly with an elephant gun." Although Mr. Foley's remark was not couched in politically delicate terms usually reserved for regulators, his point nonetheless hit home. In fact, Mr. Foley was just one of more than a dozen dissenters representing property/casualty and life insurers, reinsurers, captive managers, brokers, policyholders and law firms that testified that the draft model act proposed by the NAIC would unduly eliminate fronting arrangements.

A major concern of regulators who attended the meeting was "the power of the pen" granted by companies in fronting arrangements to managing general agents (MGAs). In such situations, an unscrupulous MGA could enter reinsurance arrangements without sufficient oversight by the insurer and thereby wreak financial havoc.

Defining the Problem

"It's one thing to say MGAs are the problem, but not all in fact are a problem," said Coletta Kemper, public affairs director of the National Association of Insurance Brokers.

"Regulators definitely have a problem with fronting arrangements," said Francis Donohue, vice president of john P. Woods Co. Inc. "The question is defining what the problem is." To allay regulators' fears about poorly managed companies in fronting arrangements, Lucille Gallagher, vice president of risk management for Montfort of Colorado Inc. and vice president of governmental affairs for the Risk and Insurance Management Society Inc., testified that companies engaged in fronting arrangements are closely monitored. "At least that has been my personal experience," she said.

"Actuarial and trending tables are provided along with reams of loss history-not just the amount of premium ceded back to the captive, but the total amount of losses," she said. Ms. Gallagher added that it is simply easier to have a carrier front the reinsurance instead of filing separate security bonds or letters of credit in 48 states.

What Do Regulators Want?

"My sense is that different regulators want different things out of any fronting regulation," said Howard Greene, director of governmental affairs for RIMS. …

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