Behind every successful global fronting programme, there is a strong and deep partnership between the client and the fronting carrier...
Behind every successful global fronting programme, there is a strong and deep partnership between the client and the fronting carrier. This relationship is based on trust, excellent communication and an efficient flow of information between the parties. The fronting carrier, an insurance company, issues policies and cedes premium and liability to a captive insurance company. A fronting carrier’s success with large global fronting programmes depends on its ability to deliver information and transfer funds in an accurate and timely fashion. A multinational client expects its insurance carrier to have a globally coordinated network that issues policies, reports on claims and provides cash flow services.
To do that well, the network needs superior technology and experienced staff. The management and coordination of large global fronting programmes is a complex process requiring a great deal of information and knowledge. Numerous issues may arise, ranging from more complex ones such as customised coverage requirements, to more basic subjects such as premium tracking.
Central administration
Successful fronting carriers standardise and automate as much of the process as possible. Dedicated fronting administration hubs equipped with sophisticated technology and experienced teams are essential for centralising and coordinating all aspects of global fronting programmes. Owning a worldwide network of policy issuing companies is clearly an advantage in global fronting since it is difficult to standardise, automate and have the same level of control over a program when policies are issued by companies outside of the corporate family.
At AIG, fronting administration hubs are used in every stage of a fronting programme’s lifecycle. With a complete picture of the global network, these hubs are well positioned to provide information about best practices and servicing issues prior to binding, including, programme structure, country-specific restrictions that may affect the programme and policy wording concurrency issues. Having a centralised administration hub helps to ensure that the documents reporting premiums and losses to the captive are standardised in a single format and language. It also provides a central location that can address any queries that arise.
Effective administration hubs are run by seasoned insurance professionals with many years of global fronting experience. There are always changes at the country level and an experienced staff understands the impact of these changes on the programmes that they manage. AIG’s hubs provide a single access point into AIG should captives and/or captive managers have queries about premium or claims reporting. Within our hubs, each account has a dedicated account manager who coordinates the service delivery for each client.
The legal structure of global fronting carriers can be complex, so knowledge of the current reinsurance procedures for all issuing offices is critical and changes must be closely monitored. With policies issued in many countries, financial reporting can be overwhelming without a continuous review of reinsurance transactions to ensure that premiums and claims flow smoothly and are booked correctly to the appropriate legal entity, and that the various statutory filing requirements in different countries are met.
Key performance metrics are typically established and agreed with a client in the relevant contract documentation prior to the inception or at renewal of a programme. These may include metrics for policy issuance, premium invoicing, premium cash flow guarantees, premium and claims reporting and billing. A hub should monitor its performance against these metrics.
Policy issuance
Once a global fronting programme has been bound, policy issuance instructions must be disseminated to the network of policy issuing offices. We believe that issuing the instructions to all offices electronically is the most efficient way to accomplish this process within the key performance standards agreed with the client. Ideally, the release of instructions is tracked electronically and the appropriate issuing office is notified regarding what policy form needs to be issued, to whom it should be issued, the premium to be collected and the reinsurance to be used to cede to the captive.
Regardless of whether the issuing office is in Russia or Argentina, at AIG instructions go out in the same format, at the same time. Since our issuing offices update the administration hub electronically, the hub can easily identify, follow up, escalate and resolve issues. With these processes, we can efficiently manage our network’s performance and report progress to the client.
The teams at our issuing offices have extensive expertise with local regulations and policy forms. These teams guide clients through the complexities of a multinational programme with coverage that meets local regulatory requirements and structures that streamline the management of global programmes.
Premium collection, movement and reporting
One of the main concerns of global fronting clients is the speed at which premiums can be collected and moved through the carrier’s network to the captives. Each fronting programme has different requirements, and each client has different stress points about timeliness of premium movements. It is critical that the carrier agrees clear performance metrics with each client since different clients have different perspectives. For example, a captive with retrocessions to third-party reinsurers may be focused on receiving sufficient premium to satisfy payment warranties, whereas another captive may want to receive all premiums prior to their fiscal year-end. Understanding the individual needs of each and every client is important in order to ensure that they are satisfied with the cash movement on their programme.
Cash teams within the administration hub monitor the various collection and remittance of premium to the captive. Premiums take into account different country requirements as they relate to tax, mandatory local retentions, local brokerage and the fronting fee charged. Captives are provided with premium advices documenting all deductions and retentions.
Many programmes have set cash flow guarantee requirements that specify the dates by which premiums must be paid to the captive to avoid incurring interest penalties. Regardless of where in the world premiums are paid to the fronting carrier, the administration hub must be able to trace local premium invoicing and collection through its multinational network and track where the premiums are at any point in time. The speed of premium collection and payment to the captive determines whether reinsurance obligations are met, foreign exchange exposure is mitigated and investment income is maximised. Managing this process must be done carefully so that funds are available when required, foreign exchange exposure is reduced, and manual administration is kept to a minimum.
At AIG, the same technology used to issue instructions to the network of policy issuing offices is used to create the programme’s cash flow reports. These reports give the captive, at a glance, details of each policy and premium in its programme. These reports also show policy issuance and premium invoicing information, plus a gross to net premium calculation in locally invoiced currency and payment to captive currency. Clients can view policies and premiums in a consistent and easily understood format through direct access to a client portal containing all information relating to their fronting programme. Real time, accurate reporting should be the goal of an administration hub.
Claims reporting, billing and collection
The volume of claims on some large fronting programmes can be very high. Therefore, it is critical that they are booked only once by the policy issuing offices and not re-keyed by any other office at a later date. At AIG, claims data from the policy issuing offices is received electronically in a standard format thereby avoiding the time and human error issues inherent with the manual re-keying of data. The ability to manage, report and accurately bill is extremely important for the carrier to be able to collect quickly from a captive, minimise the funding of losses, and reduce foreign exchange exposure.
With the volume of claims in the hundreds of thousands, the majority of claims are settled upfront by the insurance carrier and then billed to the captive. However, large claims may be requested from the captive when they arise so that the captive and fronting carrier are not exposed to material foreign exchange loss and the carrier is not out of pocket for extended periods of time. AIG agrees any cash call provisions in the reinsurance agreement with the captive and documents any client-specific claims reporting requirements in a claims bulletin. The claims bulletin is issued globally to ensure global fronting programmes are handled uniformly in all countries.
An administration hub should include a dedicated team to coordinate the reporting, billing and collection of claims. The administration hub’s position allows the central collection of claims data for a programme as a whole, rather than piecemeal on a country-by-country basis.
With its central role in the process, the administration hub is able to track and monitor any programme aggregates that have been agreed for the policy year and report to the appropriate captive or other reinsurer. Managing per occurrence and per annum reinsurance aggregates on a multinational global fronting programme requires expertise and state-of-the-art systems as multiple countries are simultaneously reporting losses that can breach an aggregate. The hub is tasked with monitoring aggregates and advising reinsurers when they are breached.
The administration hub should provide the captives with comprehensive reporting that includes paid loss amounts due, open loss reserves and incurred losses. Clients should be able to view their loss data in real time, so they can analyse their losses, report to their reinsurance panel, identify and address any risk management issues as they occur. If there is a significantly high volume of claims, there should be a method of data delivery or recommended third-party administrator that can provide the data to the captive in an agreed format.
Audit and control
An effective administration hub will have a rigorous system of checks and balances to ensure that it is compliant and meets all agreed key performance indicators. Certification by an external management system standards organisation (eg, ISO) is a means by which such compliance is monitored and maintained.
Certification requires that all of the administration hub’s processes are documented in detail and catalogued. These processes must be annually audited by the external standards organisation. Certification also requires self-audits throughout the year in order to review and revise procedures as technology and industry practice changes.
The fronting company’s certification demonstrates its commitment to maintaining quality standards as part of its normal business process and validates that this philosophy is embedded in the core values and culture of the organisation.
Technological innovation continues to play an important part in reducing the manual administration of fronting programmes and allows consistent, timely tracking and reporting. Sophisticated technology, coupled with well managed, centralised administration hubs, creates the economies of scale needed to streamline operations and standardise procedures.
This combination creates a win-win situation for all parties in the global fronting arrangement and enables the fronting carrier to demonstrate to clients the substantial value being delivered ‘behind the curtain’.
