New NAIC Model Act Requires Insurers To Tell Insurance Dept. About Frontinq Arrangements.

• Position: LOOKING BACK INSURANCE ADVOCATE - 26 YEARS AGO

HONOLULU, Hawaii -- A model act to require that licensed insurance companies notify their state regulators when they are engaged in activities defined generally as "fronting," has been adopted by the National Association of Insurance Commissioners, meeting here for its winter national meeting. The model was adopted at a plenary session on December 5.

NAIC President Steven T. Foster said this act, would provide added protection to consumers from the "sometimes hazardous" practice of fronting. The model would have to be enacted by individual states.

According to an explanation of fronting released by NAIC along with announcement of the model's adoption, it is a practice where an insurer domiciled or licensed in a state cedes business to an unlicensed reinsurer and delegates underwriting or claim settlement authority. It is used when an unlicensed insurer needs a licensed carrier to provide cover--or front--for insurance lines such as automobile and workers' compensation, NAIC explained, adding that while not illegal, the system has been abused in some cases in the past.

"In the last decade," Foster said, "several companies have failed--leaving policyholders and taxpayers holding the bag--because they gave away the pen to people who had no stake in responsible underwriting." The expression "gave away the pen refers to granting full underwriting authority outside a company's own confines.

Foster said that regulators "need to know when fronting is contemplated so that we can protect our consumers. Often the public is not aware that the company they think they have a policy with is simply fronting for an unlicensed company. If the reinsurer walks away from that business, the licensed company--and perhaps the consumer--is left holding the bag," Foster continued.

The act requires an insurer that delegates underwriting or claim settlement authority to an unlicensed reinsurer to report to the insurance department information regarding the reinsurance transaction. The report must include detailed information about premiums, losses and expenses incurred, information about the company and its senior officers, and information about any third party to which underwriting or claim settlement authority has been delegated by the reinsurer.

"Throughout this debate, some special interests have tried to muddy the waters, suggesting that this law will regulate directly captive insurers," the NAIC President...