KBRA Releases Research – What Could Possibly Go Wrong? Fronting Market Changes Overnight

August 10, 2023 at 20:41 PM EDT

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KBRA releases research that examines recent events in the fronting market, as well as what the future may hold for the sector.

The insurance fronting space was a fairly stable and predictable sector for over a decade, characterized by an attractive market opportunity, plenty of capital to start up businesses, demand for well-rated carriers to provide fronting services, and growth in aggregate managing general agent (MGA) premiums as well as a rising proportion of MGA volume that flowed through fronting carriers. But two recent major events completely changed the fronting market: Alleged claims of potentially fraudulent letters of credit (LOC) collateral from a single non-U.S. bank related to transactions facilitated by Vesttoo, and an $81.5 million pretax write-down of a reinsurance recoverable by fronting carrier Trisura.

Key Takeaways

The reputation of those in the insurance value chain is likely to suffer short-term damage as various fronting insurers, reinsurers, cedants, brokers, and MGAs assess the full financial and operational impacts of recent events.
KBRA notes that recent negative events underscore the critical importance of effective enterprise risk management and could be positive catalysts for change.
Some broader mergers and acquisitions opportunities may emerge due to the sector’s structure, while some are already underway due to evolving strategies.
KBRA believes the sector is well positioned to apply the lessons learned and potentially emerge as a stronger and more robust participant in the overall insurance market.

Click here to view the report.

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About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.