WHAT IS IT?
Fronting solutions can be developed for situations where traditional insurance is difficult to source. This includes areas where significant risk retention is required, capacity is limited, local insurance policies are required, and many other non-traditional exposures.
Trisura issues insurance policies in Canada for captives. In most instances, the captive represents unlicensed reinsurance to Trisura. The risk is normally ceded 100% to the captive, though Trisura may take a risk position if the circumstances warrant.
Trisura works closely with our clients in order to fully understand their business objectives and risks. With that understanding, we can develop a customized plan that provides effective coverage and supports their overall business strategy.
Trisura has experience in fronting insurance policies for captives and for foreign insurance companies, and is familiar with all the security requirements surrounding unlicensed reinsurance.
- Fronting for 100% reinsured programs.
- Trisura works with the captive and administrator to ensure reserve adequacy is set aside to meet future warranty obligations.
- Risk is ceded to captives, while the administrative responsibility for the program rests with a domestic administrator. The administrator may or may not be related to the reinsurer.
- This can provide a lower cost solution than conventional liability insurance products.
- Programs that generate a minimum of $100,000 fronting fee income annually.
- The captive meets capital retention requirements of at least $1,000,000.
- The administrator and captive have experience backed by Actuarial study of at least 1–2 business maturity cycles.
- The underlying warranty insurance must be of a nature consistent with Trisura’s business.
FIVE THINGS YOU SHOULD KNOW ABOUT FRONTING SOLUTIONS
1. Unlicensed Reinsurance Can Mean A Hit on Regulatory Capital
When a Canadian insurance company cedes risk to an unlicensed reinsurer, it will take a hit on its regulatory capital unless adequate security is maintained in cash or in a reinsurance security account.
2. There is a Formula for Determining the Amount of Reinsurance Security
The amount of money required in a reinsurance security account is a function of the unearned ceded premium, the unpaid claims, and the incurred but not reported claims.
3. Reinsurance security accounts may be established at most major banks in Canada.
Most if not all of the major banks have standard documents that are used for reinsurance security accounts. It is only within the last several years that reinsurance security accounts have existed in their current form, and most banks seem to have developed their forms from a common standard.
4. Insurance companies face some credit risk when ceding to an unlicensed reinsurer.
Even with a Reinsurance Security Account, if the losses on a program greatly exceed the expected levels, and the reinsurer suffers other financial hardships, Trisura could be left with unrecoverable reinsurance. For this reason, Trisura will evaluate the financial strength of the reinsurance company itself.
5. When fronting for a program, Trisura will need to pay premium taxes on the Gross Written Premium.
Insurance companies are liable to pay the premium tax on insurance policies. In addition to any net fees that the insurer requires to front for an unlicensed reinsurer, it will want to be reimbursed for the premium tax it must pay.