Insurance and reinsurance programs take on many structures. Some are straightforward traditional reinsurance arrangements. For example, a ceding insurer produces a book of business through its agency force or through independent brokers and underwrites the business through its underwriting staff. Claims are then handled by the ceding insurer's claims department. A reinsurer or group of reinsurers contracts with the ceding insurer to provide quota share or excess-of-loss reinsurance protection.
Other structures involve business produced by third parties. These third parties are often non-risk-bearing organizations that contract with the ceding insurer to produce a certain class or line of business that is then subject to reinsurance protection. A different type of structure includes a ceding insurer that bears very little if any risk of loss and reinsures all or almost all of the risk to the reinsurer, which is the real party in interest and assumes the economic risk of loss for the business written. These are called fronting arrangements. Essentially, the ceding insurer agrees to write the business but then lays off all or most of the risk to the party that really wants to assume those risks.
Sometimes the structure of the deal combines the use of a third-party managing agent that produces and underwrites the business for a ceding insurer, which in turn acts as a fronting insurer for a reinsurer. These hybrid structures conflate the issues parties often confront when dealing with managing agency and fronting arrangements.
In this commentary, published by the International Risk Management Institute, Squire Patton Boggs New York partner Larry Schiffer discusses the interplay when contracting with a managing agent and creating a fronting arrangement.