www.bermudacaptive.bm
JUN 2 - 4, 2014
Fronting – U.S. and Global What
you need to know
Fronting – U.S. and Global – What you need to
know
Fronting Programs
Moderator:
• M. Page Rouse, Chief Operating Officer, Granite Management
Limited
Speakers:
• John J. Saur, Underwriting Manager, L&F Holdings Limited
• Ray Mattholie, Group Risk Management Adviser, Jardine
Matheson Limited
• Brian McNamara, Senior Vice President, AIG Global Risk
Solutions
Fronting – U.S. and Global – What you need to
know
Why use a Front?
• Admitted coverages written (e.g., WC, Auto, employee
benefits)
• Need for rated paper
• Policy issuance and claims handling services
• Broad range of in-house expertise, including tax, insurance,
legal, and regulatory
• Enable clients to retain an element of risk, anywhere in the
world, via any financing method
Fronting
U.S.
AndStructures
Global Fronting Programs
Typical Captive Structure
Owner/Insured
Fronting Insurer
Fronting Carrier Retains:
> Fronting Fee
> Taxes
> XOL Coverage Premium (optional)
Reinsurance
e.g., dividend payments
Captive
Retrocession
Captive Retains:
> Underwriting Profit
> Investment Income
Premium
Claims
Captive Manager
Retrocessionaire
Collateral e.g., LOC, Trust
XOL coverage, e.g., cat cover
Fronting Structures
Example 1: Deductible Coverage
Without a Captive
With a Captive
$1,000,000
$100,001
$1,000,000
$100,001
Insured Layer
Paid by Carrier
$100,000
$0
Deductible Layer
Paid by Insured
Insured Layer
Paid by Carrier
Deductible Layer
Paid by Insured and
Reimbursed by
Captive
$100,000
$0
Fronting Structures
Example 2: Net Line Captive
Insurer cedes to the captive only the portion of risk the captive wants to retain
> Owner buys XOL cover from Insurer: $50M per occurrence & in the aggregate.
> Insurer cedes $400K per occurrence, $800K in the aggregate to the captive
(i.e., net line captive) and retains anything above this.
Owner/Insured
Fronting Insurer
Premium
Claims
Captive
Fronting Structures
Example 3: Gross Line Captive
Insurer cedes 100% of the risk to the captive
> Captive retains some risk.
> Excess is ceded to retrocessionaire.
Fronting Insurer
100% QS
Captive
XOL
Retrocessionaire
$90M xs $5M
Fronting Structures
Example 4: Group Captive
OWNERS (unrelated)
Company
A
Company
B
Company
C
Fronting Insurer
Company
D
Lines of business
ceded (e.g. , PI, EL)
Captive
(owned proportionately)
(Reinsurer)
L&F Holdings Limited
L&F Holdings Limited
John J. Saur
Underwriting Manager
L&F Holdings Limited
• Captive group wholly owned by PwC network
• Formed in 1998 following the merger of PW and
C&L
• Provides PII cover to all PwC network firms
• No third party business
• Monoline insurer (professional indemnity)
PwC at a glance
• World’s largest professional services network –
provides Assurance, Tax and Advisory services
• Global network of individual member firms which
are separate and independent legal entities
• 184,000 employees
• 157 countries
• US$32.1 billion revenues in FY13
Headcount by region
L&F fronting arrangements
• Global fronting arrangement with multinational
insurer
• Reinsurance of local risk
• Fronted policies in 80 territories
• Annual reviews to determine where fronts are
required
• Utilization of AXCO
Fronting challenges
• Negotiations with local insurers
– Local retentions
– Fronting fees
• Premium payments
– Timely payment of premiums
– Cash before cover
– Transfer of reinsurance premiums
– FX fluctuations
Fronting challenges
• Transmittal of signed documents
• Accuracy review of signed policies
• Wording issues
• Claims handling issues
• Foreign language translations
Fronting challenges
• Financial strength of local insurers
– Are direct premium payments allowed?
– Are direct claims payments allowed?
• Dispensations
– Local brokers can assist
– Evergreen?
Fronting solutions
• Centralized team to implement process globally
• Utilization of brokers
– Local
– International
• Communication
Ray Mattholie
Global Fronting - an Asian Perspective
Ray Mattholie
Jardine Matheson - Group Risk Management Adviser
Lockhart Insurance Company Limited - Director
Jardine Matheson Group Today
Jardine
Matheson
Group
Lockhart Insurance - Key Facts
• 1977 Lockhart Insurance
incorporated in Bermuda
Company
Ltd.
• 1997 Lockhart converted to a Segregated Cell
structure
• Lockhart has a Bermuda Class 3 license.
Lockhart Core and Segregated Cells
Jardine Matheson Group
Lockhart Insurance Company Ltd.
*Core
Business A
Business B
Business C
Business D
Business E
Business F
Cell
Cell
Cell
Cell
Cell
Cell
Lockhart PD BI Program
US$x00M
Reinsurance Panel excess $yM
Lockhart fronted
US$y0M
AIG fronted
Lockhart retained combined annual aggregate
BU(1)
$xM per occ.
BU(2)
$yM per
occ.
BU(3)
$yM per
occ.
BU(4)
BU(5)
$zM per occ.
$zM
per occ.
Various local deductibles
BU(6) $zzM
per occ.
BU(7)
$yyper occ.
Jardine MathesonFronting as part of Risk Financing strategy
• Captive ‘Core’ Fronts for XS Program
• Flexibility in choice of insurers
• UK ‘Pool Re’ Terrorism
• Special covers
• The ‘Virtual Team’
- working with the Broker and Captive Manager
The role of the broker
• Comprehensive knowledge
regulations for every territory
of
local
requirements
and
• Choice of Fronter to best meet Global footprint:
– Ability to meet insured’s requirements
– Past performance and ‘track record’
– Form of representation in key territories, i.e. Subsidiary,
Branch office or ‘Partner’
• Creating Competition
• Prepare a platform for communications, procedures, tracking
reports etc.
The role of the broker and Captive Manager
• Ensuring Performance Levels are maintained
– Know when and how to escalate issues
• Documentation
– Reinsurance Agreements
– Local policies
• Evolving the Program to meet changing needs
– Risk profile
– Local regulations
• Resolving problems as they arise
• Money Flow
Hot Topics
1. Money Flow
2. Collateral
3. Local issues in Asia
• Tariff rating
• Cessions
• Reserves
• Cash before cover
4. Pure Front v Lead Market as Front
5. Continuity v Competition
- Building long term relationships
AIG Global Risk Solutions
Global
Risk
Solutions
(GRS)
Global
Risk
Solutions
Global Risk Solutions (GRS) (GRS)
Your Global Partner for Non-Traditional Solutions to Unique Risks
Brian McNamara
Senior Vice President, Global Risk Solutions
Global Fronting
The Businesses of Global Risk Solutions
AIG Property Casualty – Global
Footprint
• 42,000 employees who serve clients worldwide
• 51% of premiums written outside of the U.S. and Canada in 2013
• Over $100 million average claims paid each business day in 2013
Global Fronting - Facts
• 400+ multinational clients, predominantly in US,
Global
Europe and UK
GlobalRisk
RiskSolutions
Solutions(GRS)
(GRS)
• Estimated $4.5 billion in gross premium
• A business AIG has been in for over 50 years
• 41 GRS staff in Bermuda