Complexity rises as fronting market growth accelerates in 2024, says Conning

The fronting market continues its strong growth into 2024 but is becoming increasingly complex, according to a recent report by Conning.

This growth is driven by trends in the managing general agent (MGA) sector, rising demand for capacity, and robust excess and surplus (E&S) expansion.

The fronting market benefits from strong backing by over 200 reinsurers. The relationship between the two is mutually beneficial: reinsurers provide essential support to fronting companies, while the fronting market has become increasingly important to reinsurers. In 2023, the fronting sector ceded more than $11 billion in premiums to nonaffiliated reinsurers, with even higher figures expected in 2024.

Reinsurers find this business attractive because it involves specialty insurance for small to medium-sized enterprises (SMEs), which is hard to find elsewhere and has minimal exposure to catastrophic risks.

The fronting business model is also evolving, with companies retaining more premiums as reinsurers push for greater alignment. This shift has led to more complex retention strategies, including the use of affiliated captive insurers, offshore vehicles, and retrocessional programs to support front companies’ retention.

Steven Webersen, a managing director in Conning’s Insurance Research unit, stated, “Between dependence on reinsurance, reliance on multiple third parties, a shift to greater premium retention, and a need for more capital, the business has become more complex to manage and analyse.”

Webersen also noted that fronting companies are maturing, growing into their capital bases, and showing improved earnings. However, they are also facing higher leverage and many still maintain high concentrations among customers and reinsurance partners.

Mergers and acquisitions in the fronting sector appear to be on hold, suggesting a valuation gap between buyers and sellers, as well as a heightened diligence bar.

Webersen continued, “So far, front companies have been able to grow almost as fast as they want or can.

“Growth in the underlying MGA market is cited as a key driver. However, we believe the proliferation of the fronting market has been a contributor to MGA growth. That will not always be the case, and when growth slows is when we will begin to see consolidation.”

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