Fronting Clause
The fronting clause provides that a locally admitted insurer issues a policy on behalf of an international programme leader and cedes the bulk of the risk back to it through reinsurance.
- Clause type
- Condition
- Origin/Market
- International programme
- Favours
- Neutral
- Negotiability
- Negotiable
Purpose
In many countries risks may only be covered by an insurer locally admitted there, while the international programme leader is not itself licensed in that jurisdiction. The fronting clause governs cooperation with a local fronting insurer, which issues the locally required policy but cedes substantially all of the risk assumed directly back to the programme leader or its reinsurer through reinsurance, in return for a fronting fee.
Effect and limits
Because the fronting insurer remains legally liable for the full sum insured even though the economic risk has been almost entirely ceded, it stays obliged to the insured if the reinsurer or the programme leader becomes insolvent; this credit risk is usually mitigated through security (letters of credit, trusts) or net settlement arrangements. The clause must also be compatible with local regulatory law, which in some jurisdictions imposes minimum capital retention or approval requirements for fronting arrangements.
Negotiation and practice
When selecting a fronting insurer, programme leaders should assess its financial stability, local market knowledge and experience with comparable international programmes. When negotiating the fronting fee and the reinsurance structure, it should be clarified how claims payments and cash flow between the fronting insurer and the reinsurer are timed, so as to avoid liquidity shortfalls.