Whether you are negotiating a fronting fee with an insurance company for the first time, as you have a "start up" captive insurance company, or you are looking to renegotiate a "renewal" captive company fronting fee, you are going to be in for the insurance education of a lifetime.

The cost of "fronting" goes up on the very basis that there is a shortage of insurance companies willing to "front." The insurance market losses companies like Quanta Capital, Alea, etc. and thus reduces the options available. Where are the new fronting insurance companies going to come from? Hurricanes Katrina, Rita, and Wilma have brought havoc to the property captives, where we see fronting fees rising to 15%. The new Bermuda companies will acquire U.S. insurance company platforms and will be the "fronting" insurers of the future.

Owners of captive insurance companies must realize that "fronting" insurance companies need to be approached on various levels of management, with preferably senior management getting into the decision making process early on in the negotiations.

Underwriting Departments are playing a greater role in captive fronting, with the financial departments looking closely at the credit risk of the parent transaction. For instance, several years ago, construction companies would capitalize captive insurance companies just to insure the self-insurance deductible under their Owner Contractor Insurance programs. Now "fronting" insurance companies are examining the financial statements of these same construction companies to make sure they can sustain the ownership of the captive insurance companies. Interestingly enough, captive owners need to continue to monitor the financial statement of their fronting insurer, and to be on top of any potential rating downgrades by the rating organizations. Insurance company management historically has had a tendency of "failure to disclose" negative results.

Fronting insurance companies are playing a greater role in the selection of the domicile for the captive insurance company. Domestic versus offshore domicile continues to be debated. Even on shore domiciles like New York State, with its 35 captive insurance companies, are trying to expand the captive concept by reducing the threshold, $100 million parent net worth to $25 million parent net worth captives. More advertising needs to be injected into the New York captive initiative.

Most of the experienced, fronting insurance companies, have shown the ability and expertise to "front" captives from Vermont domiciles to Hawaiian domiciles, and from Barbados to Bermuda. The focus has been to continually drive down overhead expenses and those domiciles doing this are attracting all the new captive formations.

Interestingly enough, domestic captive domiciles did not lead in 2005 formations, with Bermuda and the Cayman Islands accounting for 134 captive formations. Vermont with 37 captive formations led the United States.

Fronting insurance company pricing for the risks going into captives are getting a closer look by the actuarial profession. Captive owners have come to recognize they need their own actuarial support when disagreeing with the fronting insurance company's assessments of what is the correct price for the risk. Whether you are a residential contractor in California or a nursery home in Florida, your captive requires adequate pricing executed by the fronting insurer. We are going to see more litigation in the future between captive owners and their front insurance companies, as the disagreements over pricing continue to persist on each renewal.

Captive owners want their front insurance companies to come up with independent prices for each risk, and that concept continues to be a problem with the front company. When it is admitted, and has to use their filed rates. Insurance company market conduct reports are going to expose front carriers that they are violating their rate filings when writing primary insurance products which are reinsured back to the captive insurance company.

The more mature captive insurance company, with over five years of financial history, needs to have a committee of its Board of Directors look closely into the entire costing structure of the fronting fee. This would be a great excuse for members of the captive board to understand this important transactional cost.

What are the detailed components of the fronting fee? How are they monitored by the captive owner? When was the last time a new fronting company was asked to quote on the captive? Once the captive board gets this training, the Boards will not be "rubber stamps" and exercise more judgment at insurance decision making.

More and more mature captives are looking to write their Directors and Officers Liability Insurance into their captive. The front insurance company writes the traditional D and O form, and that risk in then ceded back to the captive, acting as reinsurer. The exclusions in the traditional D and O policy are then covered by a direct procurement policy from the captive, eliminating the need for the front. The pricing for the direct procurement policy should be controlled by the owner of the captive. In some aspects, a captive writing direct insurance policies in the United States should apply for an A.M. Best's rating. If we remember captives are a long time investment and by getting an "A" rating from Best's, the captive becomes a substantial asset.

Reciprocity among captive owners can be another way of eliminating the "fronting" fee. Each owner uses the "A" rated captive for each other's risks, and purchases a sophisticated reinsurance program behind both captive insurance companies. When fronting fees approach double digits, it is necessary for captive owners to seek alternatives to "fronts." Creative solutions need to be implemented, and captive company budgets need to have the financial resources to explore alternatives.

Finding "fronts" for Contractors Pollution Liability Insurance is another area that is getting significant attention. General contractors, residential or commercial, trade contractors, carpentry and plumbing, specialty contractors, foundation and pipeline, and remediation contractors, are all candidates for captives, and in the early years require "fronts." Captives can substantially reduce the insurance costs of traditional pollution coverage for contractors, especially when layering of policy limits is introduced above the captive retention. Customary pricing above the captive retention follows the simplistic approach that the lower liability layers are priced higher than the upper layers, again giving the captive owner a "pricing" discount.

The identification of the "fronting" carriers has not changed dramatically in the last few years:

1. AIG

2. ACE

3. Old Republic

4. Zurich

5. Liberty Mutual

6. Discover Re

7. Chubb

8. Hartford

9. Arch

The negotiating process with each of these carriers has always been a challenge for captive owners. Insurance company "fronts" are a dynamic group, and with people constantly changing positions, requires that you pay significant attention to your fronting carrier to continually provide favorable relationships and eliminate misunderstandings. When was the last time you asked your fronting carrier, how is my program going rather than react to their letter saying they are going to cancel your "fronting" relationship because they are returning from that particular insurance product line.

There have been a number of studies on what the "fronting fee" includes, or should include. The amount of these fees keep changing but the overall concept remains the same. Focus and concentrated efforts are required to keep this "fee" economically effective.

Among the recent "fronting fees" the following is included:

1. State Premium Taxes (not negotiable);

2. Federal Excise Taxes (not negotiable);

3. Government schemes (not negotiable, but try and get how they are arrived at);

4. TRIA charges (usually not negotiable);

5. Aggregate protection (negotiable, look at the concept of purchasing this yourself from outside the structure); and

6. Profit margin for carrier/fronter (negotiable).

If loss ratios are attractively low for your captive insurance company, make every effort to obtain a lower "fronting fee." Insurance carriers are always seeking low loss ratio business even as a "front." If you can, try to influence the decision maker. Many "fronting fees" get renewed as is when they are comparatively high in mature, and it is in the carrier's interest to renew as is because there is little additional costs in doing renewals. It is the "lifeblood" of the insurance company.

On the basis of regulatory and rating agency fear, "fronting" carriers have made a conscious effort to require and substantially increase the collateral requirements they are asking for from captive owners. This is an area of negotiation and as many Agent Owned Captive Insurance Company Owners have found out, too late, over collateralized programs lead to the inability of the agent to fund the letter of credit and therefore the "front" cancels the program.

Captive Owners need to know that over-funded collateral is another way a "front" company can access additional capital for growth. You need to understand the true components of the collateral required:

1. Loss Reserves (Schedule F - loss reserves plus unearned premium reserves and Incurred But Not Reported losses) ... IBNR deserves the most attention since these are estimates, and does the Captive Owner want to pay for an independent actuarial study for the loss payout pattern, and full development.

2. Many "front" companies want funding that would include funding the letter of credit equal to high loss ratios, this is despite the fact they had set the pricing on the "fronted" policy. Owners need to have the expertise to challenge the methodology of the pricing.

In conclusion, "fronting" insurance companies provide "licensed paper," which is asset value; they provide regulatory compliance and finally support services. Remember if fronting fees are greater than 5%, and mostly in the 6-10% range. When going over 10%, it is imperative that you look for another option.

The insurance agent has been given very little exposure to and education in the world of reinsurance. Most agents only become aware of reinsurance when an insurance company underwriter tells the agent that they cannot write that risk because our insurance company's treaty reinsurance agreements prevent us from writing that type of business.

Since reinsurers over the years have been the traditional risk-taking company, their influence in determining underwriting philosophy for primary insurers has grown significantly. Many reinsurers today, because they are taking a larger amount of exposure on a particular insurance company's individual risk, now dictate the primary pricing, the amount of the deductible, the amount of the credit or debit. Reinsurers now have to know a great deal more about the primary insurance business.

The agent should consider the purchase of a reinsurance program for its agent-owned captive insurance company. Many of the approaches to buying reinsurance are similar to what a traditional insurance company uses. The agent needs to be familiar with the various types of reinsurance:

1. Quota Share Reinsurance

2. Excess of Loss Reinsurance

3. Catastrophic Reinsurance

4. Aggregate Excess of Loss Reinsurance

5. Stop Loss Reinsurance

6. Finite Risk Reinsurance

Although the capital requirements for starting agent-owned captive insurance companies, particularly those in the offshore domiciles, are comparatively small, careful consideration should be paid to the structure of a comprehensive reinsurance program. Gone are the days when aggregate stop loss reinsurance could be easily ascertained to guarantee underwriting profits for the agent-owned captive.

Bearing this in mind, the net retention of the agent-owned captive should be compared to its financial structure and the agent owner's risk taking philosophy. Most agent-owned captive insurance companies operating today have too great a new retention when contrasted with traditional insurance companies, and also taking into consideration their financial structure.

Whether the agent-owned captive purchases only quota share reinsurance or uses a combination of several types of treaty reinsurance agreements, the reinsurance program must be monitored and consistently evaluated. The degree of difficulty increases dramatically when designing a reinsurance program for a newly formed agent-owned captive insurance company.

Reinsuring the Policy-Issuing Company
with Your Agent-Owned Captive

A policy-issuing arrangement in your agency-whether it be a retail agency, wholesale agency, or managing general agency-is when a policy is issued by a licensed property/casualty insurance company, whether admitted or non-admitted. Then it is reinsured up to 100% by the traditional reinsurance company market that would include the agent-owned captive insurance company. This type of arrangement is sometimes referred to as "fronting" and is almost always used when the agent has formed an agent-owned captive.

The policy-issuing company is paid a "fronting fee," and is reinsured 100%. Some property/casualty insurance companies have had as their franchise model offering their "A" rated carrier as a "frontier," thus transferring underwriting risk for financial risk. Fronting companies must consider state premium takes, residual mods, government schemes and assessments, and that is why the agent needs to be trained in negotiating a fronting fee. Experience with this type of fee shows that the pure profit margin on a fronting fee can vary from 3% to 7.5% depending upon the fronting insurer.

For example: An agent-owned captive insurance company operating in the Florida restaurant insurance marketplace reinsures the first $75,000 of underwriting loss behind the policy-issuing company. In addition, the reinsurer also owned by the same financial group that the policy-issuing belongs to, writes the excess of loss reinsurance above $75,000 up to $500,000, at a rate of 17.5% of GNWPI. The excess of $500,000 up to $1,000,000 of limit for the restaurant program has another rate, as a percentage of gross net written premium income. The reinsurer is a direct writing reinsurer, and negotiates its excess of loss treaty reinsurance agreement directly with the policy-issuing insurance company, since they also have other treaty reinsurance agreements in place with each other, none of which has to do with the agent-owned captive insurance company.

To have a successful agent-owned captive insurance company, the agent has to understand the negotiating process when buying reinsurance either in the direct reinsurance market or through the reinsurance intermediary market. The agent will also get a better understanding why the underwriting cycles exist in the property/casualty insurance industry, and be able to take advantage of these underwriting cycles. When policy-issuing insurance companies take very little underwriting risk, and the actual underwriting risk is transferred to the traditional reinsurance market (as well as the agent-owned captive insurance company), the agent will begin to need to negotiate with reinsurers.

Using Quota Share Reinsurance Provided
Only by the Agent-Owned Captive

Here is another example: The Cayman Island agent-owned captive insurance company originally started to write horse mortality insurance, and was capitalized substantially by a bank, using the collateral of the agency. On the basis of this substantial capitalization, the agent-owned captive was able to write 100% of the quota share reinsurance of the policy-issuing insurance company. Policies originally written in the agency were issued in the policy-issuing insurance company, 100% reinsured to the agent-owned captive, who in turn purchased an outgoing going reinsurance program, consisting of a combination of quota share reinsurance and excess of loss reinsurance.

The accumulation of profits in the Cayman Island agent-owned captive insurance company was used to purchase a "shell" property/casualty insurance company which went on to be an "A" rated specialty niche program insurance company after several stock offerings.

Conclusion

The owner of a retail insurance agency (i.e., program administrator) the owner of a wholesale, excess and surplus lines insurance agency, and/or the owner of a managing general agency need to explore the feasibility of implementing an agent-owned captive insurance company. Recapturing investment income and underwriting profits gives the agent-owner significant returns on investment.

Owners of captive insurance companies, as they continue to grow in asset value, need to look at expanding their Board of Directors to include the experienced Independent Director, regardless of domicile. The longer the captive insurance company remains in business, the greater the chance the captive will get into serious issues that will require a good deal of insurance industry expertise.

As an insurance practitioner for 40 years, let's go over some of the issues that will come up for the "mature" captive taken from actual experiences.

Reinsurance Recoveries

The initial feasibility study contemplated only one reinsurer and now, due to market conditions, the captive insurance company finds itself with five reinsurers, with different limits of excess of loss protections. One of the reinsurers does not want to pay the excess claim and the captive has to select a reinsurance litigation law firm. This is not exactly within the job description of an insurance risk manager. Where does the captive's risk manager turn for good advice? Does the captive litigate or arbitrate? What is the arbitration process all about, and can captives secure reinsurance recoveries through the arbitration process? Most captive owners have had no experience with this type of event. Failure to collect the reinsurance recovery may result in an insolvent captive insurance company.

Renegotiate the Fronting Fee

How many renewals have you gone through without getting the "front" insurance company to reduce its fronting fee? Who is responsible to devote the financial resources and time to explore new options for a "front" insurance company? Many captive owners never shop their fronting fee on the simple basis that they have no resources available to meet with potentially new "fronts". It will be necessary for the "fronts" to solicit the captives, as they do at all the captive insurance company conferences held both domestically and offshore, especially in a soft underwriting cycle.

Captive owners need to understand the components of a "fronting fee," and more importantly, what parts of the "fronting" fee are negotiable. The "front" company has all the components qualified from state premium taxes to residual market fees, to insurance company overhead.

Restructuring the Reinsurance Program

It is the responsibility of the captive owner to continuously monitor the reinsurance program and search for economic options. The pricing of reinsurance is not controlled by any regulatory body and therefore it is market driven. Many captive owners have never been exposed to the reinsurance negotiating process, nor are they in a position to benchmark reinsurance prices. Risk managers have very little national contact, other than their local chapter meetings. The cost of reinsurance is a big factor as respects the profitability of a captive, and must be negotiated by experienced executives. Independent Directors can help with that process.

Independent Directors

In contrast to the captive insurance company, the publicly held insurance company has used Independent Directors, mostly from the accounting and legal professions. Private equity firms that invest in insurers are looking for Board Directors to represent their interests, especially where they have a significant stock position.

Kim and Pat started in business on the same day aligning themselves with the same provider. They hit it off immediately; however, as much as they liked each other they also realized they're in competition for the same business. They were both eager to start their new businesses and confident in their success.

It's been a little over two years since that first day when Pat and Kim met. Things are very different than they were on that day.

Kim did everything the way the sales manager showed him. He faithfully followed the presentation. He made so many calls it felt like his ear would fall off at times. He never took "no" for an answer and he was always moving for the close.

He knew it would be rough at first like he'd been told. That didn't lessen his enthusiasm or confidence. In fact, he was so confident and so enthusiastic he and his wife went out and bought the RV they'd been dreaming of. Because he thought that little extra pressure was exactly what he needed to really get fired up. Kim could see himself, his wife, and the kids enjoying the wilderness before they even signed the load agreement.

Every client Kim pushed to a close he told himself, "three more." The sales manager said every new client was good for at least three strong referrals. And that meant he was really four clients closer to getting the financially secure business he wanted, or did it?

Looking back Kim feels like he's been a rube. He can't believe he bought into the company kool-aide like that. At this point he's looking for a job. He and his family are in so much debt there's nowhere else and no one else to turn to. He's tapped out and he feels like a complete and utter failure. No dream business for Kim. He's never felt lower in his entire life.

Kim can't help but wonder what Pat's doing and how he's doing it. While Kim has been working 24/7 and still couldn't eke out anything you could call a living Pat seems to have the money rolling in. He's out playing around more than he's working. What the heck is the deal?

Yes, Pat does seem to have it on easy street now. Pat started out doing the exact same things as Kim just like he'd been told to do them. Pat couldn't stand the way he had to treat people to do what the sales manager said he should do. He was hoping once they were clients he could show them he wasn't like that, but he quickly learned the hard way that first impressions are lasting impressions.

It didn't take long before Pat came to the conclusion he either had to find a better way to do this, or get out of the business because he couldn't continue to treat people like this. He knew this was standard industry practice so that meant he had to look outside the industry to discover a workable way. He knew what he had to offer was truly valuable to his clients there had to be a way to help them rather than cramming it down their throats.

Pat looked outside his industry and started working with a coach who could help him grow his business. This meant Pat had to learn how to market himself, how to hold genuine sales conversations that positioned him as an advisor not a pushy salesperson, and how to run his business. It didn't take long before Pat began to experience some big changes.

When Pat did it the "industry" way he felt like a pushy predator constantly on the prowl for fresh game. Now Pat had people coming to him. He never had to push people to make a decision or chase after them. This was such a tremendous relief for Pat he began sleeping a whole lot better at night.

Pat slept even better as the money began to roll in. He felt a little guilty about Kim. It wasn't that he didn't want to help Kim because he did. At first he kept things to himself because when he'd mentioned a couple small things the sales manager had ridiculed him and told him to stick to what he was telling him. He also wanted to prove to himself they worked because he didn't want to feel responsible for anyone else failing if he was wrong. Although he wondered just how responsible he could feel as he saw good people failing out of the business almost daily.

Time is the enemy and unfortunately Kim was among those who had run out of time. It was too late for Pat to do anything for Kim now. As Pat looked around he realized most of the old boys who've made it aren't doing things the way the "industry" says to do them. They're doing a lot of the things Pat now knows to do. However, they don't tell anyone how they're getting their success.

They just keep telling the newbies to keep doing the same old tired techniques that everyone knows doesn't work. Pat feels pretty sad about this, but Pat has a successful business to run so he turns his thoughts to his next appointment. As he does thinks to himself how if he hadn't gotten the help he needed from his coach he'd be in the same position as Kim.

The case for justice against some insurance company practices has been submitted. But despite the guilty verdicts, the victims, all insurance agents, have never received true justice. Now it is time for exposing the truth.

Oil Companies were found guilty of making billions of dollars in profits off gas consumers. For over one hundred years Life Insurance Companies have made millions off of consumers. However making money off of consumers is the American Dream to getting rich. This article reveals a turn of events on whom is making money off whom.

The guilty verdict is unanimous when Life Insurance Companies train their agents to fail. When an agent fails, every upcoming premium and renewal is forfeited to the Career Life Insurance Agency. Using their unaltered time tested practices, success means an agent leaving, not an agent being promoted. An agent lacking money and survival skills can only last so long until leaving. That's when the Insurance Company easily can make over $200,000 additional on the policies this agent wrote.

THERE ARE SIX COUNTS WHERE LIFE INSURANCE COMPANIES HAVE GUILTY VERDICTS

1. The person(s) that recruits you must follow guidelines. The data is highly revealing. It reveals that fully 50% of applicants can not go out and sell insurance. They are order takers and not insurance seals people

2. The companies gladly hand new agents "leads", so bad in quality that no experienced agent would want them for free.

3. Career agents do not get guaranteed vested renewals until they have been with the company 5 to 10 years, if ever. The company knows 10% or less of the agents will still be there in four years.

4. Often a career agent gets a commission of say 55%, instead of 65%, 75%, or even 90%. Surplus overrides go the career insurance agency to offset expenses. (Plus a little skimming off the top)

5. The career agent receives very little on hands assistance outside the office from the life sales manager. The sales manager spends some time with the other 14 new agents. Additional time is set aside for following up on his own leads, conducting staff sales meetings, and spending time working on recruiting more agents.

6. The average sales manager has consistently at least one agent in the phase of quitting or being forced to quit for lack of production. This same new sales manager must get another replacement agent in the training stages and rolling along.

The departed insurance agents look like a failure, and the accounting of insurance company profits look like a big success. It almost like looking at the faces of a bus load of senior citizens leaving a casino where every machine was rigged.

Insurance profits constantly increase, compliments of former insurance agents.

Many Americans believe America is the land of opportunity. America certainly is, but the insurance industry is not the land of opportunity. Sorry. As long as there are people looking for jobs and the insurance ads imply they are stairways to achieving the American dream, there's no way to pull this plug.

THE HIGHEST CONCENTRATION percentage wise of favorable factors, not the state size determined our results. 2 large geographic states, Colorado and Arizona are right down near the bottom of the list. Demographic data, relative income, agent base, consumer figures, and demand are a few of the decisive relevance used.

THE TOP INSURANCE AGENT STATES ARE FLORIDA, CALIFORNIA, AND TEXAS.
Florida gets the #1 top insurance agents ranking

Florida is the number one state without any doubt. Here are some reasons. The population of experienced agents to the total citizen population is on the low side. Enhancing this is the constant influx of elderly new residents. Many of these higher middle income and new residents, wind their way down from the Northeastern and Midwestern states, sweetening the potential client base.

In percentage of senior citizens Florida ranks number one. This senior retiree is ideal for investment annuity and financial products. Top insurance agents enforce their savings lasting long enough. Additionally, the large senior citizen base opens up a tremendous and almost unlimited long term care insurance need. With so many seniors, agents specializing in selling senior market products have plenty of prospects to explain benefits to. For other agents, the younger than average work force is rarely unionized and employer paid health plans are rare, making major medical and supplemental products a ready made market.

THE MAIN REASON FLORIDA HAS THE HIGHEST PERCENT OF TOP INSURANCE AGENTS..Veteran insurance agents from Midwestern and northeastern states, with 25 to 30 years of proven experience decide to end their productive selling career. To get away from the cold and blowing snow, the choose Florida as the state with the southern sun, that will provide the fun they so rightfully deserve. But after awhile this former insurance pro starts to get antsy. Shuffleboard, and buffet dinners are a long way from the challenge and thrill a good insurance sale provided.

The agent looks at some choices: supermarket bag boy, shopping store greeter, restaurant bus boy, or independent insurance agent. The choice is easy, he gets licensed again, giving him excitement and independence, while still maintaining a semi-retirement. These top insurance agents have so much product knowledge and selling skills, that their "part time" efforts can exceed those of full time agents. Rock the market with best overall agents in their class.

Ranking extremely close behind Florida are California Insurance Agents
California ranks as the champion when you look at the ratio of total licensed agents to those that independently broker insurance products - it is unsurpassed. Agents are exceptionally open minded to new producers to broker the best plans to their clients. The number of 50 to 300 agent career agent agencies is very low, and because of congested traffic, the amount of personal producing General Agents that are home based exceeds all others. This distinct factor is directed more toward the metro Los Angeles area.

Where's the area of least resistance? Definitely the northern portion of California, zip sectional centers 940-960. These agents are passed over by extensive telemarketing, email, or mailings their southern counterparts do. As these agents are ideally receptive, the downfall is that to retaining a top insurance agent is that product must remain superior, along with maintaining a strong agent relationship.

A unique reason California agents are among the highest moneymakers. Just look at the average cost of owning a home in upscale area of California, and compare it to some upscale cities in southern states. It is often surpasses 6 times as much to buy! This means the top insurance agents in California need to make money and lots of it. Translated to recruiting it provides an unparalleled need to write mighty large premium polices. In addition a steady flow of applications. California is a treasure chest state.

"Good, better, best; never let it rest till your good is better and your better is best." --Anonymous

TEXAS HAS A HIGH PERCENTAGE OF TOP INSURANCE AGENTS

Let's look at the direct negative aspect first. Over 3 out of 10f licensed agents is licensed with a very controlling captive multi-line insurer. Just look in the yellow pages, and you will find agent after agent advertising SF, Farm Bureau, AAA, Nationwide, and similar carriers. This eliminates a lost of agents rarely selling life and health insurance policies.

The power tools evident in Texas are (1) the agent turnover is well below the national average, (2) the number of independent agents and agents that broker outside their primary carrier is well above the national average. Add to this the small amount of unionized employees or those with employer benefits, and you have a golden egg for health and medical plans. Texas oil and cattle ranch farms are a magnet for high level estate and financial planners. In Texas its lead or follow with no in-between. Lead the way by carefully selecting the top insurance agents in Texas.