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HMRC internal manual

General Insurance Manual

Captive insurers: fronting

The broker is also the important link to other insurers and reinsurers, for the captive usually plays only a part in the group’s overall strategy for dealing with any particular risk. This may involve an arrangement known as fronting under which the risk is initially placed with an unrelated general insurer, sometimes the one who carried the risk before the introduction of the captive. Under this arrangement the first contract of insurance is between the group and the independent general insurer. The general insurer then reinsures all or most of the risk with the captive for the original premium less a fee or commission to cover costs and make a turn on the insurance.

Fronting may be done for a number of reasons. Certain kinds of primary insurance (such as employers’ liability) must by law be placed with EEA regulated insurers. Moreover the group would not want full exposure on such cover and the third party insurer may retain the highest level of cover and reinsure out only the lower levels to the captive. Other types of insurance, such a warranty cover on electrical goods, involve insuring non-group risks. The captive would have to trade in the UK to cover these risks, so the UK fronting company has to accept the risks initially before reinsuring them to the captive. Fronting also enables the group to avoid claims handling costs, although in some cases the work will be undertaken by a group company under an agency arrangement with the fronter.