Captives are seeking pure fronting arrangements for risks that lack capacity in the commercial market, according to Joshua Nyaberi, head of captive fronting at Zurich Insurance Company.
When a captive enters into a pure fronting agreement with a carrier, they are essentially paying a fee to use a carrier’s licences and rated paper without transferring any risk to the commercial insurer.
“Captives seek pure fronts for such difficult to insure risks and often serve as incubators for the risks until such a time as traditional markets start to actively participate in them,” said Nyaberi, speaking on a recent episode of the Global Captive Podcast.
Nyaberi said while Zurich was seeing pure fronting requests, in his view there is no discernible trend in terms of an increase or decrease in interest in this type of structure.
“However, in a world of new and even so-called ‘uninsurable’ risks, captive owners want to have programmes that enable them to formally set aside risk funds to respond to loss instances when they arise.”
Among the key motivations for pure fronts is the need for the captive to control the reinsurance placement for the excess risk that it does not wish to retain.
“This also presents arbitrage opportunities for the captive,” Nyaberi said. “Here we are talking about pricing arbitrage, capacity arbitrage, or wording arbitrage.”
Secondly, Nyaberi said captives want pure fronting when there is a necessity to retain a risk for which the fronting carrier has no appetite to participate in.
“And thirdly, there’s sometimes the desire to actually retain the entirety of a certain risk, often due to its favourable profile for the captive owner.”
Also speaking on the GCP Short, Dr. Carin Gantenbein, global head of network management at Zurich Multinational, said there are key areas Zurich is focusing its attention when it comes to pure fronting for captives and traditional programmes.
“One is clearly on quality and speed, so delivering accurate instructions, issuing policies quickly, managing premium payments very efficiently – this is really essential for captives,” she said.
“Then streamlined cash flow processes help also ensure everything runs smoothly.”
Gantenbein added that it is important to have strong network collaboration.
“Excellent service relies really on a close knit and collaborative network, having strong expertise locally, and building also strong relationships across all involved partners is really crucial,” she said.
“And last but not least is digitalisation, which is driving not only seamless operations from a system point of view but also going down the route of deep insights into data and analytics, which is very crucial for captives.”