Demystifying Multinational Fronting Insurance Programs

The podcast offers insights from Zurich North America’s Stephen Penwright, Property Technical Director, and Kay Eisenstein, Vice President - Captives & Reinsurance. The speakers will cover practical insights, real-world examples, and best practices for managing these complex structures.

Moderator: Justin Smulison, Business Content Manager, RIMS

Speakers:

• Stephen Penwright, Property Technical Director, U.S. National Accounts, Zurich North America
• Kay Eisenstein, Vice President - Captives & Reinsurance Manager, U.S. National Accounts, Zurich North America

Webinar Transcript

(PLEASE NOTE: This is an edited webinar transcript, capturing speakers with natural speech patterns that may include incomplete sentences and/or asides, grammatical errors, verbal shorthand, and some statements that may be less clear in print.)

Justin Smulison:

Welcome to a special episode of RIMScast, sponsored by Zurich. I am Justin Smulison, business content manager here at RIMS, the Risk and Insurance Management Society, and I am proud to be your RIMScast host. Today's episode is titled "Demystifying Multinational Fronting Insurance Programs," and I am joined today by Stephen Penwright, Property Technical Director for U.S. National Accounts at Zurich North America, and Kay Eisenstein, Vice President for Captives and Reinsurance Manager of U.S. National Accounts also at Zurich North America. The three of us will explore how fronting works, why it's used, the roles of captives and reinsurance, as well as the benefits and challenges. We will provide real-world examples of its application and best practices in managing these complex structures. We're going to learn a lot; let's get to it. Steven Penwright and Kay Eisenstein, welcome to RIMScast.

 So let me set the stage: Property fronting arrangements are key as risks evolve. Many multinational companies are retaining more or all of their property risk, sometimes through higher deductibles or a captive, as individual insurers take less of it sometimes by reducing capacity or spreading risk across a panel of reinsurers. Understanding what fronting arrangements are is essential to this complex solution. So, let's have Stephen kick things off for us. Can you start by explaining what multinational fronting insurance programs are?

Stephen Penwright:

Sure. I'm going to break it down in two scenarios and I'm going to focus on property. The first scenario is when the carrier is writing 100% of the risk. And at the direction of the USA first name insured, the risk manager, the broker, we issue local policies around the world where there's exposure. And there's an internal reinsurance agreement between the local insurance companies and the USA producing insurance company/entity. The more common scenario is when a risk is so large that insurance companies are sharing the risk. For example, 20%, five carriers are taking 20% of a $500 million limit. The broker and the USA customer will tend to elect one insurance company of the five to administer the local policies, and that carrier sets up re-insurance contract between the fronting company, the elected company, and then the reinsurance panel. Those reinsurance agreements are for premium sessions and claim sessions. The reason this situation is so common, it provides control and streamlines what the US risk manager is procuring in the United States and provides consistency along all of the local various policies issued in country.

Justin Smulison:

Tell us why would a company choose to implement a fronting insurance program instead of purchasing standard insurance directly in each jurisdiction?

 Kay Eisenstein:

Large multinational companies can't do it alone. In many countries, they need assistance to provide certain coverages or certificates of insurance from licensed carriers in those local jurisdictions. They also need assistance in claims handling and potentially boots on the ground when it comes to risk engineering services. So if a risk manager seeks a fronting arrangement with an insurance provider or a fronting carrier that has international capabilities, they can help them customize large global programs which provides those additional services and those additional services include compliance with tax laws and other local regulations in those various countries.

 Justin Smulison:

So like you said, it's just practical that the insured needs a front-end carrier partner.

 Kay Eisenstein:

Yes. So, for example, we talked about consistency, standardization among different coverages among different countries. Also it's all about claims handling. It is important when you buy that insurance policy and that local jurisdiction, You want to make sure that claim gets handled as what you expected here in the United States and for your local subsidiaries in those local jurisdictions.

 Justin Smulison:

So how does the fronting process work in practice? Who are the key players involved?

Stephen Penwright:

Yeah, for sure. So collaboration and communication are key. There are reinsurance agreements that need to be executed. So the broker, the fronting carrier, and the reinsurance panel member all have to be communicating to make sure these reinsurance agreements are executed correctly. I will say that it starts with the customer setting allocations for each country that's going to receive an individual local policy. That's the starting point. The customer needs to work with their local subsidiary to make sure they can absorb the allocation and then the broker needs to coordinate locally with that local broker, and then the broker in the United States needs to coordinate with the fronting carrier, and the fronting carrier and broker in the United States are coordinating with the re -insurance panel member. It could be as many as 30 re-insurance panel members. It could be as small as three re-insurance panel members, but the key to all this, Justin, is making sure people are communicating, hitting deadlines timely and making sure I will add one plug for the correct entity. That correct entity and vetting of that entity has to be on the re-insurance agreement. It isn't their brand name. It's actually underwriting paper that needs to be vetted.

 Justin Smulison: How do you typically see captives utilized?

 Kay Eisenstein:

Let's talk about what a captive is first. A captive is an insurance company that the insured owns.Now, let's discuss different ways to use utilize captives and how they're utilized. So we're going to start off talking about first loss retention. A first loss retention is where the captive absorbs the first portion of the first primary loss layer. That is as simple as terms you can get it.

 Another way is a deductible buy down. This is where, for example, the customer might negotiate a $25 million program deductible layer or retention layer, but the risk manager also has to contend with his internal stakeholders in his organization. The local jurisdiction might have a $5 million deductible. That $5 million deductible is what the local jurisdiction will retain; the captive will retain the delta between the $25m and the $5m and so that captive retains $10 million in that case. From that perspective, the customer bought the program at a $25 million retention point, and then he's appeasing his treasurer from a pricing perspective because the risk transfer pricing is attaching at $25m. He's also appeasing his internal stakeholders because they get to keep their lower deductibles at the lower price.

 Another solution is where the captive participates as a reinsurance panel member. This is where the customer participates. We talked about first loss retention, and they may participate as a quota -shared deal vertically side by side with a panel member. Just like Steve articulated earlier, we talked about reinsurance and panel members, a captive can act as a panel member within it’s own program. Typically, we see that is when our customers view and programs, they believe in their loss control, and they will retain that risk.

 Another program that we see in the marketplace is a gross line session captive. This is where our customers actually retain risk, and they utilize different ways to do this. So, for example, a customer might issue, the captive might issue a policy, a US master policy in the United States, but as we talked about earlier, the fronting carrier has the capabilities to issue local policies around the globe in certain jurisdictions because again, that fronting carrier has the licensing to do that. So, in that case, the user captive is the aggregator where they pull the risk together into the captive, and then the captive would then share that risk with the panel of reinsurers, or what we call them as retrocessionaire.

 Justin Smulison:

What are some of the key challenges that multinational companies face when setting up a fronting program?

 Stephen Penwright:

It is a huge coordination effort. Coordination needs to happen between the fronting and re-insurance panel broker. In addition, the US risk manager has a lot of coordination to happen internally. A common error that we see a lot is discrepancies between statements of values that are presented to the insurance companies. The USA risk manager may have a building value at $5 million. But when that policy under the direction of the US to issue the local policy shows up with that $5 million limit, a lot of times we see that local entity pushing back, saying, "No, the building is not valued at $5 million. It is valued at, say, for example, $2 .5 million." And that really, again, I hit on this before, is communication, making sure that risk manager has vetted the values with that local entity prior to this inception of a fronting program.

 Similarly, we see challenges on invoicing and what the expectation was from a premium allocation standpoint. Again, insurance has been around for a long time. Fronting is probably a bit newer, even though I'm told it was done with fax machines back in the day and everything actually got executed. But the reality is communication and coordination are the key to all of this.

 Justin Smulison:

We covered a lot of ground here about multinational fronting insurance programs with two longtime leaders in the space from Zurich, North America. 

What are some key points that risk managers should keep in mind when seeking a fronting carrier?

 Stephen Penwright:

A global network, making sure your operations, the U.S. Risk Managers operations align with that fronting carriers local subsidiary offices. So, for example, if you have operations exposure in China and Australia and your fronting carrier doesn't have operations owned operations in those two countries, probably not the best fronting carrier. You can solve that through local partnerships, but you would want to make sure you're vetting that closely with that front-end carrier to make sure what you expect, gets executed locally. Another thing to keep in mind when seeking a front-end arrangement is clarity and consistency of policy language. If your fronting carrier has a globally consistent form, that's going to ensure that that policy is operating as you intend and aligns with the U.S. Master, something you can review very simply. The other challenge which Kay discussed before is buying individual local policies not integrated with a global master policy, you have no idea how those local policies are written, how they would respond in the event of some type of integrated claim. Making sure you have a globally consistent policy will ensure contract certainty with these fronting arrangements. And then claims capabilities. I hit on this a second ago when the operation in these local jurisdictions has boots on the ground that will expedite claims. You don't necessarily want to be flying independent adjusters all over the world to get boots on the ground. And some of that may not be locally compliant either. So, making sure those claims operations are set up locally and frankly, the claims operations need to be familiar with that policy to expedite any type of claim payment and adjudication.

 Justin Smulison:

What else should risk managers keep in mind when seeking a fronting carrier?

 Kay Eisenstein:

Additional talking points I'd like to add is work with a fronting carrier that can create holistic and customizable solutions. That's going to be really important. Not every company wants a one -size -fits all approach. It's important to have some flexibility when it comes to carving out in local jurisdictions and creating certain coverages in these certain regions. The other thing is dedicated international specialists. That's kind of important. When you work with an underwriter, that underwriter in the property room is he's dedicated to the property assessment and risk. Well, when you work with a fronting carrier, you want to work with fronting carrier that has dedicated international specialists. They understand how the local jurisdictions work. They understand how to ask the right questions because we deal with different cultures. To understand how to deal with compliance gaps and to make sure that you have concurrent insurance programs in the local jurisdictions to what you intended to purchase on a global master program.

 Justin Smulison:

How does risk engineering factor in?

 Kay Eisenstein:

Risk engineering services are important because we want to make sure that we take proactive steps to build resilience in those local jurisdictions so that we have a profitable program and a controlled insurance program in the future.

 Justin Smulison:

We are in an increasingly digitized world. How does that influence decision-making when selecting a fronting carrier?

 Kay Eisenstein:

Digital tools such as portals and dashboards are driving the future of fronting insurance programs. Companies that are vetting a fronting carrier may want to ask whether the provider has a source of digital tools that can simplify access to information about their fronting program anytime and anywhere in the world.

 Justin Smulison:

That was great. A special thanks to Stephen Penwright and Kay Eisenstein of Zurich, North America, for their time and expertise. 

Risk World will be held May 4th through May 7th in Chicago, Illinois, and if you plan on attending, you can find Kay and Steve at Zurich's booth, which is number 1013. Tell them RIMScast sent you.

 To learn more about multinational fronting or property risks and trends, visit ZurichNA .com and follow Zurich, North America on LinkedIn.

For additional insights visit Zurich Property Insights Collection.