Old Republic: Unbundled fronting – resilience in uncertain times

Old Republic Risk Management’s Jim Duffy and Mike Posko explain how having an unbundled fronting carrier can help captives weather unpredictable market conditions


Volatility and uncertainty in any environment can create challenges but they can also create opportunities. Those who are willing to adapt and are motivated to succeed can flourish in the most demanding of times.

The insurance marketplace is currently experiencing varying degrees of volatility and uncertainty caused by hardened markets in property, unpredictability in liability lines, catastrophic natural disasters and other contributing factors.

Fortunately, one of the routes to sustainability has been captive solutions, for which both supply and demand have grown exponentially.

By design, the captive marketplace is not a “one size fits all” solution. A captive is not just a vehicle to provide customised insurance. It is a business, and therefore requires another layer of diligence.

When considering the coverage, costs and claims of a risk management programme, including the newly formed captive business, it is important to examine each underlying component to understand how to employ them in the most efficient and effective manner.

Nearly every component of a risk management programme – including underwriting, policy construction, filings, policy issuance, programme administration, claims management, loss control and a host of others – share three common traits.

First, they all have a funding source, typically either as a component of premium dollars to a carrier or fees in exchange for service. Second, they can all be either bundled as part of a larger programme or unbundled for increased visibility and control.

And third, the party responsible for each component is typically the carrier, captive manager, captive, or some combination of these.

Generally, the more sophisticated the purpose of the captive, the more desirable and advantageous unbundling each of these components becomes.

Highly sophisticated captives require highly customised solutions, and an unbundled fronting carrier can offer the flexibility to achieve this.

When the captive’s purpose and objectives are clearly understood in the beginning, a tailored, unbundled programme can help meet the captive’s specific objectives.

More than that, it may provide the opportunity to manage risk more precisely as the captive’s results play out over time.

Such an arrangement can enhance the captive solution by providing greater control over coverages, costs and claims management.

Coverage advantages

A fronting carrier can provide a captive greater flexibility through its ability to manuscript coverages, within contractual and/or regulatory constraints, to focus on only those risks the captive is intended to address.

This leads to greater programme efficiency because the premium dollars spent truly go only to those areas intended to be covered, versus a broad and generic first-dollar or low-deductible insurance programme.

Cost and flexibility advantages

A captive’s flexibility to assume either all or a portion of the risk distils the cost of insurance specifically to those areas of risk the captive desires to assume.

The captive has considerable input in determining the layer of risk participation and how much of the risk, if any, is transferred to the fronting carrier and/or other reinsurers.

Claim advantages

An unbundled fronting carrier provides a captive with the unique advantage of choice. The captive has great flexibility in choosing the third-party administrator (TPA) whose expertise and fee structure best aligns with the way a captive would like their claim management to be handled.

Having a TPA with the sophistication, expertise and experience in managing claims specific to the captive’s needs provides a number of advantages.

First, a TPA provides specialised expertise for large and/or complex claims. Having a TPA that has competence in handling the types of claims specific to a captive can significantly decrease the size and scope of complex claims.

A TPA that understands the proper resources to deploy at the time of a large claim can make a significant difference in both the time and cost of the claim to the captive. Second, a TPA arrangement can provide increased premium stability over time.

One of the largest single drivers of premium increase is the cost of claims frequency and severity. Partnering with a TPA that is practised and efficient at processing claims specific to a captive’s needs leads to greater efficiency in processing claims, which lowers the cost per claim.

Overall, this arrangement can provide more premium certainty over time. Third, expert claims handling provides reputational benefits.

Captives are increasingly used as a vehicle to incorporate related third-party risk. This can lead to more individual customers filing claims, making the TPA the perceived face of the company to a customer involved in a claim dispute.

Partnering with a TPA that is experienced in managing expectations in a professional manner can improve brand image and decrease reputational risk. And fourth, partnering with a TPA provides valuable insights.

A TPA that is aligned with the captive’s objectives shares its expertise, including knowledge of claims processes and the types of risks characteristic of the captive’s industry, all of which can assist the captive in reducing exposure to risks in the future.

If adaptability is the key to survival, these coverage, cost and claim advantages illustrate how an unbundled fronting carrier can augment a successful captive solution. The captive’s objectives ultimately determine the type and level of programme customisation.

But when the highest degree of choice and flexibility is needed to address varying market conditions over a long-time horizon, an unbundled fronting carrier can be a valuable partner in the captive space.

12 August 2024
5-6 November 2025

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