FACULTATIVE COVERAGE – A form of reinsurance where the reinsurer accepts or rejects individual risks. If a member of a group captive has an individual need for additional coverages not shared by the group, these coverages can be placed facultatively with the captive’s reinsurance treaty.
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FEASIBILITY STUDY – The feasibility study step determines your captive design, discuss the types of insurance coverages your captive should offer, estimate the costs to form and operate, include financial proformas prepared after the underwriting assessment is completed and the domicile recommendation made, and discuss the pros and cons of creating the captive.
FEDERAL RISK RETENTION ACT – Revised and enacted in 1981, this act does not allow a state insurance regulator to prohibit risk retention groups domiciled in other states from operating within the regulator’s state, thus eliminating the need for a fronting company. It also allows a form of reinsurance which considers the time value of money and has loss containment provisions, and is transacted primarily to achieve financial goals, such as capital management, tax planning, or the financing of acquisitions.
FINANCIAL GUARANTEE INSURANCE – Insurance against losses arising from the bankruptcy of the insured. The insurer guarantees the performance of the insured, e.g., for debt repayment.
FLAT RATE – In reinsurance, a percentage rate applied to a ceding company’s premium writings for the classes of business reinsured to determine the reinsurance premiums to be paid the reinsurer.
FOLLOWING THE FORTUNES – The clause stipulating that once a risk has been ceded by the reinsured, the reinsurer is bound by the same fate thereon as experienced by the ceding company.
FRONT COMPANY – An insurer that issues a policy and reinsures all or a significant part of the risk to another insurer.
FRONTING/ISSUING COMPANY – A fronting company is a commercial insurance company licensed and admitted in the state(s) where a risk to be insured is located. The captive contracts with the front to issue its policy to the insured(s). The front then transfers all that risk to the captive and/or reinsurers through a reinsurance agreement known as a fronting agreement. Fronting companies provide various levels of involvement from simply providing the paper for the policies to complete underwriting and issuance. Of course, their fees vary to match the depth of their services. The result is insurance policies issued on admitted paper, but with the risk associated with the coverage retained by the captive.
