Contents

improve, LIMRA’s forecast cited a reduction

of interest rates as a potential headwind for the

industry. On the plus side, products with protection

features will continue to be sought after by

consumers, and the demand for guaranteed income

will grow, LIMRA said.

Giesing said sales could see a “slight pullback”

in 2024 as rates go down, but demographic forces

coupled with improving equities markets will push

sales through 2027. Improving stocks could prompt

a shift in product mixes, with variable annuities

taking a greater share of the market as the focus

shifts from protection to accumulation, he said.

“As we see more growth in equities markets, we’ll

see a shift and investors taking on more risk with

their annuity purchases,” Giesing said.

For 2023, LIMRA is forecasting sales in the range

of $304 billion to $325 billion. While the forecast

calls for a dip in 2024, growth is expected to resume

in 2025 and reach a high between $325 billion and

$345 billion by 2027.

Sales of traditional fixed-indexed annuities,

which offer a balance of protection and growth,

are expected to flatten between 2023 and 2027,

according to LIMRA. Interest rates will begin to

decline in 2024, then rebound as current contracts

come out of surrender periods, LIMRA projected.

While the top line may be down from current levels,

the group said they will remain above historical

averages.

Brighthouse, like some of its peers, has tried

to shift its annuity book of business toward

newer, more lucrative products. “Profitable new

business growth is essential to drive our business

mix toward lower-risk, higher-return products

and away from legacy variable annuities,” Eric

Steigerwalt, chairman, president and chief executive

officer of Brighthouse, said during an earnings

announcement.

Also, like its peers, Brighthouse will soon be

reviewing its second quarter earnings and the impact

annuities have had on those numbers. In the first

quarter of 2023, the company reported a net loss

available to shareholders of $525 million compared

with net income of $1.56 billion for the same period

a year earlier. The results for 2023 were driven by a

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distribution partners.

But as the fronting carrier segment grows in

both participation and capacity, the industry is

particularly concerned about a reinsurer’s ability to

respond to claims by the fronting insurer.

Indeed, fronting companies can be subject to

residual tail risk if it’s not assessed properly, AM Best

said.

“This is more likely for emerging risks for which

experience and data are more limited. Credit

risk associated with reinsurers is generally closely

managed through the use of highly rated reinsurance

panels, tight exposure limits and a regular review of

collateral,” according to the June 2023

Best’s Special

Report: Hybrid Model Provides New Opportunities for

Fronting Carriers

.

One such fronting group, Trisura Group Ltd.,

encountered such issues. Despite exceeding $1

billion in direct premiums written last year, Trisura’s

outlook was revised from stable to negative by AM

Best in March. This reflects required improvements

in Trisura’s operational risk management processes

around management of captives within its U.S.

operations, which it is actively addressing, AM Best

said.

The revision followed a CA$81.5 million ($31.5

million) one-time write-down of reinsurance

recoverables in the fourth quarter of 2022, which

substantially offset consolidated net income,

according to AM Best.

AM Best said Trisura lacked sufficient collateral

to support a reinsurance recoverable related to

a fronting program for a captive reinsurance

program on U.S. property/casualty risks. The

program’s collateral had been depleted due to higher

catastrophe reinsurance costs. That program was

then put into accelerated runoff.

Like many traditional insurers, a handful

of fronting carriers also have faced a difficult

reinsurance renewal season due to the hardening

property market, AM Best said.

“Reinsurers may also be less patient with merely

adequate or poorly performing lines,” AM Best said.

Capacity and Risk

Climate risks also are presenting challenges,

“with wildfires, floods and other climate-driven

catastrophes occurring more often,” AM Best said

in its report. “To help secure capacity for property

risks, fronting companies have widened their net to

bring in more insurance-linked securities capacity.”

“Whether it’s severe convective storms in the

middle of the country, tornado, hail, wind, wildfire,

I think those losses are going to be here to stay,”

Everspan Group President Steve Dresner said. “I

think our strategy to avoid the lines is minimizing

an over-the-top exposure. Prior to the last five

years, there was a market for uncapped quota share

reinsurance. That’s gone away. That has forced

carriers to take on more risk.”

Of the AM Best-rated U.S. fronting companies,

eight specialize in excess and surplus lines, and four

specialize in commercial, personal and specialty

lines.

“I think there’s more than enough of these

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“Whether it’s severe convective

storms in the middle of the

country, tornado, hail, wind,

wildfire, I think those losses are

going to be here to stay.”

Steve Dresner

Everspan Group

to make sure we’re building sustainable long-term

relationships,” Freeman said.

Reinsurers’ success depends on the fronting

company’s ability to execute risk selection,

underwrite, price, and settle claims, analysts say.

In its report, AM Best said reinsurers are growing

more selective about the business they write and the

entities with whom they are willing to partner.

Alignment of interests is important, and this

includes the amount of risk fronting carriers are

willing to take on. Dresner said reinsurers are

looking for fronting companies to take on more.

Everspan takes between 20% and 25% of most of

its programs. “Reinsurers look at that and say ‘OK,

they have skin in the game.’ They’ll offer a bigger

line to us maybe than one of our peers because they

see a bigger alignment of interest.”

“If a fronting company is willing to keep 10% to

20% or even a little more, you’re showing that you

are going to hold up to your end of the bargain in

terms of bringing the business in and acting as the

fronting company than if you were keeping 2% to

5%,” Blades said. “You’re in it for the long haul, and

you have the confidence that you can follow through

and do what you say you’re going to do from a risk-

selection perspective.”

Building Bonds

In its special report, AM Best said these new

companies “have been formed to take advantage of

favorable market conditions and to build premium

revenue.”

They’ve also served as an alternative way for

insurers to enter a market and grow premium.

Fronting carriers issue a policy to the insured, and

the insured pays the premium. Captives work with

a fronting carrier through a reinsurance agreement,

putting the fronting carrier between the two entities.

The fronting carrier handles the underwriting and

typically cedes a large portion of the risk to the

reinsurer.

Everspan is one of 13 new fronting carriers that

emerged in the past decade, according to an ALIRT

Insurance Research report.

In 2022, AM Best-rated U.S. fronting carriers

recorded $10.56 billion in direct premiums written

for 2022, 43% higher than in 2021, according to

the AM Best report. State National Group, Clear

Blue Insurance Group and Trisura Group Ltd. each

exceeded $1 billion in direct premiums written for

the year.

“Many of these entities are pursuing strategies

similar to the one that market leader State National

Group has used successfully over four decades,” AM

Best said in the report. “They seek organic growth,

using strong relationships with distribution partners

(often MGAs) and select reinsurance partners,

leveraging existing opportunities in the market for

fronting paper—usually on a participatory basis.”

Freeman said a lot has changed in the space

over the past couple of decades as fronting had

often been considered a last resort. There was also a

belief and perception that in the earlier years of the

fronting industry little focus or attention was spent

on building strategic partnerships meant to last and

grow.

“Obviously, there are needs that are short term

in nature in the marketplace, and we want to be

able to satisfy those as effectively as we ever have,”

Freeman said. “But where we want to invest more

time and energy is creating that infrastructure and

those partnerships that are really built for strategic

longevity and purpose, and I think we’ve been really

successful in that arena.”

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How Litigation Funding Is Affecting

Settlement Strategies, Costs

Claims and legal experts call for consistent disclosure requirements as the

growing practice exhibits a greater impact on the insurance industry.

by John Weber

L

itigation funding is here to stay, according to a

panel of claims and legal experts who recently

examined the growing issue, including trends in

disclosure requirements and how funding is affecting

settlement strategies and litigation costs.

Best’s Insurance Professional Resources recently

hosted the webinar

How Insurers Are Responding

to Funding-Backed Litigation

, which included

participants Michael Briggs, partner, litigation

John Weber

is a senior associate editor. He can be reached at

john.weber@ambest.com.

and dispute resolution, McMillan LLP; Marie

Castronuovo, partner, Russo & Gould LLP; Fred

Fisher, president, Fisher Consulting Group Inc.; and

Janine McCartney, Ph.D., HHC Safety Engineers.

Following is an edited transcript of the

conversation.

How common is litigation funding?

Briggs:

It’s becoming more common. The main

areas we’re seeing it is in class actions, where you

see the majority of the case law developing. We’re

also seeing it in insolvency and restructuring. It is

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Litigation Funding