What to think about when replacing a

fronting carrier?

Mark Fitzjerrells, Sr. VP, Cottingham & Butler

Brian First, Sr. VP, Arch Alternative RiskRick Fernandez, President, Specialized

Transportation Ins. Ltd.

What to Think About When Replacing a Fronting Carrier?

We will be offering 3 unique perspectives to this question:

Consultant – Mark Fitzjerrells, C&B, has been through the transition to new fronting carriers in several of the group captives that he consults for thus bringing the broad perspective of how consultant, front and captive have to work together for the best result.

Fronting Carrier – Brian First, Arch, can readily address through his unique experiences the importance of the fronting carrier and the impact that they have on the overall success of the captive.

Captive Owner – Rick Fernandez, as the President of a group captive that has gone through replacing their fronting carrier, has the unique perspective on how he handled the situation and how his leadership impacted the outcome for the captive and its owners.

Agenda

1. Reasons for replacing a fronting carrier2. Pros and cons of replacing a fronting carrier3. Preparing the captive owners4. What to consider when searching for a new front5. Formalizing the new fronting carrier relationship6. Steps to take to protect the captive and to

ensure a lasting fronting carrier relationship7. The importance of leadership within the captive8. Thoughts from a captive owner

Audience Questions?

By show of hands,

How many of you have been involved in replacing a fronting carrier?

Was the captive forced to find a new fronting carrier?

How long did you have to find a replacement-Less than 6 months?More than 6 months?

Reasons For Replacing a Fronting Carrier

“Normal” Circumstances:1. Costs – lower priced options available2. Collateral – unreasonable collateral demands, no preset

formulas3. Underwriting – outgrow, change of direction4. Change in relationship – turnover, conflict5. Claims handling – no longer meeting expectations6. Risk – inability to offer commutations7. Service – policy issuance, audits, communication8. Loss experience – if providing reinsurance as well

“Abnormal” Circumstances:1. Operating Changes – focus, resources, channel conflict2. Financial Changes – downgrade, sale, insolvency

Reasons For Replacing a Fronting Carrier

Audience Question:

Any additional reasons for needing to replace a fronting carrier come to mind?

Pros and Cons of Replacing a Fronting Carrier

Pros1. Solve a problem!2. Potential for lower costs 3. Potential for a lower collateral requirement4. Fresh start – re-energized focus ( fronting carrier &

captive)5. Potential for improved underwriting capabilities6. Potential for coverage enhancements7. Potential for improved service – claims, processing8. A more focused sense of direction/partnership

Pros and Cons of Replacing a Fronting Carrier

Cons1. Don’t solve the problem or improve upon prior front2. Costs are higher or change after a year or two3. Potential for additional collateral from captive owners4. Might signal opportunity for captive owners to cease

participation5. The “known” is sometimes better than the “unknown”6. Might require a change to business plan/operations7. Might send a negative message to potential new

partners8. The near term need for an additional change in

fronting carrier could be catastrophic to the captive

Preparing the Captive Owners

1. Regular discussions on how their fronting relationship is going – profitability of captive and front, any concerns/issues, what is going on in the marketplace

2. Regular interactions with their fronting carrier – invite fronts to board meetings, captive executive teams to visit fronts

3. Discuss the importance of the fronting carrier and the role that they play

4. Make sure that they understand the “Pros and Cons” of changing their fronting relationship.

5. Communicate, Communicate, Communicate

What to Consider When Searching For a New Front?

1. A well defined marketing approach agreed to by all parties.

2. How the current front will value claims/handle collateral once the relationship is severed

3. Financial Strength – AM Best Rating4. Length of time in the fronting business5. Dedication of resources/management commitment6. Alignment of underwriting philosophy7. Ability to offer terms that are consistent with the goals of

the captive – collateral, commutations, pricing, multi-year deals

8. Alignment with those responsible for day-to-day servicing9. Conversation/Agreement on the acceptability of the

captives preferred service providers – brokers, TPA, Safety, etc.

Formalizing the Fronting Carrier Relationship

Make sure everything is in writing and that the following has been addressed:

Agreements – get copies of all potential agreements that will need to be signed early in the process so that these can be negotiated as part of the process instead of after a decision has been made to partner.

Collateral – what is required, how it will be determined and how it will be returned. Try to agree on a formula.

Commutations – how to rid the captive of liabilities at some point in the future. Gain commitment to offer and on a process.

Formalizing the Fronting Carrier Relationship

Face-to-Face Meeting – make sure that the new fronting carrier has had face time with the captive owners prior to committing.

Meet with top management – this is critical in understanding their commitment to fronting.

Get to know the people – the fronting carrier has a big say in the overall success of a captive. It is important to make sure that everyone is on the same page and that there is a unified vision of what success is.

How to Protect the Captive and Ensure a Lasting Fronting Relationship

1. Communicate, Communicate, Communicate2. Make sure that everything is in writing3. Include the fronting carrier, where it makes

sense, in the activities of the captive4. Address concerns/issues early on before they

become problems.5. Respect the needs of both parties – captive &

front6. Don’t be afraid to make tough decisions and to

ask the tough questions.

The Importance of Leadership in the Captive

1. Provides a framework for change – regardless if it is forced or unforced change

2. Instills confidence – they are in the “know” and all will be good.

3. Helps to attract quality partners – can aide in securing new fronting carriers.

4. Keeps the captive together – everyone remains committed

5. IT SURE BEATS THE LACK OF LEADERSHIP!

Thoughts From a Captive Owner

Rick Fernandez, President of Specialized Transportation Ins. Ltd.

1. The front is the most important puzzle piece in our captive (outside of our consultant!) – we have to have one, they have to like/understand our business, they have to support our goals and they have to treat us fairly.

2. We had to switch fronting carriers in 2014 as a result of our partner at that time losing their “A” rating.

3. There was concern about what the future held but the strong group of partners

and leadership displayed by everyone involved took most of the concern and worry away.

4. I view the fronting relationship as one that is very long-term in nature as long as

the captive is treated fairly.

5. Picking the right fronting carrier is critical to the success of the captive. We were fortunate in that our first fronting carrier choice didn’t work out but the grass certainly appears to be greener on the other side!

Primary Takeaways

1. Changing fronting carriers should not be taken lightly as it can have a significant impact (positively and negatively) on the operations of the captive

2. Changing fronting carriers can be made much easier by keeping the captives owners informed of all issues/concerns and by having a plan

3. There are many operational items to keep in focus when looking at a new potential fronting carrier

4. The leadership of the captive will ultimately play a very significant role in guiding the captive through the transition to a new front and keeping all of the captive owners committed to the process

Questions