fronting
The use of an insurer to issue paper—that is, an insurance policy—on behalf
of a self-insured organization or captive insurer without the intention of bearing
any of the risk. The risk of loss is transferred back to the self-insured or
captive insurer with an indemnity or reinsurance agreement. However, the fronting
company (insurer) assumes a credit risk since it would be required to honor
the obligations imposed by the policy if the self-insurer or captive failed
to indemnify it. Fronting companies charge a fee for this service, generally
between 5 and 10 percent of the premium being written. Fronting arrangements
allow captives and self-insurers to comply with financial responsibility laws
imposed by many states that require evidence of coverage written by an admitted
insurer, such as for auto and workers compensation insurance. Fronting arrangements
must also be used in business contracts with other organizations, such as leases
and construction contracts, where evidence of coverage through an admitted insurer
is also required.
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