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Advisory committee examines fronting issue.

by Tom johnson At the fronting working group hearing at the National Association of insurance Commissioners' winter meeting in Louisville, KY, Patrick Foley, vice president and associate general counsel of American International Group Inc., testified to regulators that their proposed model act was "like trying to shoot a fly with an elephant gun." Although Mr. Foley's remark was not couched in politically delicate terms usually reserved for regulators, his point nonetheless hit home. In fact, Mr. Foley was just one of more than a dozen dissenters representing property/casualty and life insurers, reinsurers, captive managers, brokers, policyholders and law firms that testified that the draft model act proposed by the NAIC would unduly eliminate fronting arrangements.

A major concern of regulators who attended the meeting was "the power of the pen" granted by companies in fronting arrangements to managing general agents (MGAs). In such situations, an unscrupulous MGA could enter reinsurance arrangements without sufficient oversight by the insurer and thereby wreak financial havoc.

Defining the Problem

"It's one thing to say MGAs are the problem, but not all in fact are a problem," said Coletta Kemper, public affairs director of the National Association of Insurance Brokers.

"Regulators definitely have a problem with fronting arrangements," said Francis Donohue, vice president of john P. Woods Co. Inc. "The question is defining what the problem is." To allay regulators' fears about poorly managed companies in fronting arrangements, Lucille Gallagher, vice president of risk management for Montfort of Colorado Inc. and vice president of governmental affairs for the Risk and Insurance Management Society Inc., testified that companies engaged in fronting arrangements are closely monitored. "At least that has been my personal experience," she said.

"Actuarial and trending tables are provided along with reams of loss history-not just the amount of premium ceded back to the captive, but the total amount of losses," she said. Ms. Gallagher added that it is simply easier to have a carrier front the reinsurance instead of filing separate security bonds or letters of credit in 48 states.

What Do Regulators Want?

"My sense is that different regulators want different things out of any fronting regulation," said Howard Greene, director of governmental affairs for RIMS. "Some see fronting as evil, while others only want to curb identified abuses like the ones cited in Congress' Failed Promises' report." Mr. Greene added that he believes many regulators realize that the draft was overkill."

According to Ms. Kemper, "The notion that fronting is inherently wrong and just used to get around laws and defraud the public was dispelled by the testimony. The NAIC still hasn't identified the problems involved in fronting." Indeed, Mr. Greene said some regulators have admitted that their worries might be "assuaged by amending current NAIC model acts."

To that end, the NAIC has appointed an industry advisory committee to examine the fronting issue. Working in tandem with the committee, the NAIC hopes to have a revised model act by year-end.

According to Mr. Greene, who along with Mr. Donohue has been appointed to the committee, "The NAIC would be best served by discarding the current draft and starting from scratch," In addition, he said, "The most logical approach would be to look at current NAIC models such as the MGA Model Act and the Credit for Reinsurance Model Act to see whether they do the trick. If not, the committee should look at various ways the model acts might be altered to address regulators' concerns." Injecting a cautionary note, Ms. Kemper said, "Basically, a model bill doesn't really do anything anyway. It is the various state regulations and laws that stem from such a bill that carry the real weight."

Committee Is Chosen

In addition to Mr. Greene, Mr. Foley and Mr. Donohue, who is chairman of the committee, other members include Gregory Allgeier, Bolton & Co.; Carl Badean, Pluschau Consultants Inc.; David Brummond, National Association of Independent Insurers; Carolyn Cobb, American Council of Life Insurers; Donald Greene, LeBoeuf, Lamb, Leiby & MacRae; E. Michael Joye, Reliance Insurance Group; Andrew Klivan, Norman Reitman Co. Inc.; Janet Melchione, Prudential Reinsurance Co.; Larry Nabours, Fidelity Security Life insurance Co.; Edmond RondePierre, General Reinsurance Corp.; James Schibley, Lincoln National Corp.; Phillip Schwartz, American Insurance Association; Alan Troop, Jardine Risk Management, a subsidiary of Jardine Insurance Brokerage Inc., and S. Roy Woodall Jr., National Association of Life Cos.
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Author:Johnson, Tom
Publication:Risk Management
Date:Feb 1, 1991
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