Fronted Program or Deductible Reimbursement Policy - Which is Better for a Captive?

This topic can be confusing, but the best choice depends on several factors; overall objectives including the risk profile, client’s goals, how much control they want or are comfortable with, and the line of coverage being ceded to the captive. Both structures involve the captive acting as a reinsurer—either directly to the insured or through a fronting carrier.

Deductible Reimbursement Policy

A deductible reimbursement policy transfers expected losses through a reinsurance agreement between the captive and the insured. In the case of policies with large deductibles for key lines, it’s a straightforward approach to begin using a captive. Premium ceded to the captive is based on projected ultimate losses in the underlying policies and is used to reimburse the insured for deductible payments as losses are paid. There is typically no collateral requirement from the captive, but the issuing insurer will require collateral under the large-deductible program.

This approach can also work well for self-insured retentions (SIRs) on coverage lines such as workers’ compensation, commercial auto, and certain healthcare products. In these cases, the retention is authorized at the state level, eliminating the need for admitted paper.

Fronted Programs

Fronted programs can be a better fit for more volatile or difficult-to-model lines, especially during adverse market conditions. They offer flexibility to place risk within the captive where appropriate and obtain risk transfer where needed. Common examples include property, products, and warranty programs. Fronting fees are typically charged as a percentage of premium or a flat rate. The fronting carrier will require collateral for the layer reinsured by the captive, with the amount commonly based on expected losses or the full fronted limit, depending on the program structure. Collateral requirements in fronted programs are often more restrictive than those found in large-deductible programs placed directly with an insurer.

Takeaway

If you have predictable loss picks under large deductibles or SIRs, a deductible reimbursement policy is often the simplest way to route that risk to the captive. However, if you require admitted paper and want more flexibility in how much risk the captive retains—particularly for more volatile insurance lines—a fronted program is typically the better solution.

Get Expert Guidance on Fronting vs. Deductible Reimbursement Policy

If you have questions about whether a Fronted Program or Deductible Reimbursement Policy is right for a particular client, schedule an introductory call with a CAP consultant. We’d welcome the opportunity to discuss potential options and next steps.

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