Question 1

What does a fronting insurer remain liable for, even though it cedes nearly all of the risk away?

Accepted Answer

100% of every claim, to the policyholder, exactly as if it had kept the whole risk — Cession never reduces the fronting insurer's legal obligation to the policyholder — only how much of the economics it keeps for its own account.

Question 2

Why do fronting arrangements typically require heavy collateral, such as letters of credit or trust funds, from the reinsurer?

Accepted Answer

The fronting insurer's credit exposure to a single reinsurer is unusually concentrated, since it kept so little risk itself — Almost all of the fronting insurer's claims-paying ability on that programme runs through one reinsurer's credit — collateral is how it protects itself against that concentration.

Fronting

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