The fronting insurance market maintained its rapid growth in 2023 and into 2024, but the industry is also facing greater complexity, according to a new report by Conning.
The report, authored by Steven Webersen (pictured above), managing director in Conning's Insurance Research unit, highlights that the fronting business has become more challenging to manage and analyze due to several factors.
These include a growing reliance on reinsurance, dependence on multiple third parties, a shift toward higher premium retention, and an increased need for capital.
Webersen observed that while fronting companies are maturing and demonstrating improved earnings, they are also experiencing higher leverage. Many companies continue to have significant concentration among their customers and reinsurance partners.
The report delves into the use of reinsurance and the role of key business partners, noting that fronting companies benefit from strong reinsurance support and are becoming increasingly important to reinsurers.
Mergers and acquisitions within the fronting sector appear to be on hold, possibly due to a valuation gap between buyers and sellers and a more rigorous due diligence process.
Webersen said that fronting companies have been able to grow at a rapid pace, driven in part by the growth of the underlying managing general agent (MGA) market. However, he cautioned that the proliferation of fronting could slow down, potentially leading to market consolidation.
The fronting sector has been influenced by various factors, both positive and negative. The market has largely moved past the fallout from the Vesttoo incident last year and has continued to experience significant premium growth.
According to Conning, reported fronting premiums exceeded $15 billion in 2023, representing a 27% increase. The actual size of the market is likely larger, as some participants do not disclose their fronted premiums. This growth is supported by trends in the underlying MGA market, demand for capacity, and strong growth in the excess and surplus (E&S) lines.
The fronting market also enjoys substantial support from more than 200 reinsurers. The relationship between fronting companies and reinsurers is mutually beneficial, with reinsurers providing essential capacity, while the growing fronting market becomes increasingly important to them. In 2023, the fronting sector ceded more than $11 billion in premiums to non-affiliated reinsurers, with expectations for further growth in 2024.
This business model is particularly attractive to reinsurers, as it primarily involves specialty SME (small to medium-sized enterprises) premiums, which are difficult to source elsewhere and generally lack significant catastrophe exposure.
The fronting model has evolved, with companies retaining more premiums as reinsurers seek greater alignment. This has led to more complex retention strategies, involving the use of affiliated captive and offshore vehicles, as well as retrocessional programs supporting the front companies' retention levels.
The overall health of the fronting market presents a mixed picture. While many fronting companies are generating better profitability and growing into their capital bases with reduced program concentration, leverage is also intentionally increasing, along with premium retention. However, with much of the premium being "new business," the loss experience remains relatively untested.
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