In September 2026, AM Best published an analysis warning that the involvement of unrated and unauthorised reinsurers is adding credit risk to US property casualty fronting arrangements. The report was announced on 30 September and examines a market that expanded during 2025.
For captive boards, the relevance lies in the obligations that remain when risk is transferred between entities. A fronting structure needs scrutiny of recoverability and operational continuity as well as the commercial rationale for placing the programme.
Risk transfer leaves an obligation chain
AM Best describes fronting as a licensed insurer passing most or all of the transaction risk to a reinsurer. Its release cites market estimates of more than USD 30 billion in fronted premium in 2025 and notes reinsurer demands for greater front retention. These are market observations, not evidence that every structure is unsafe.
The governance question is how each party would meet its obligations if another participant could not pay. A board should map policy payments, reinsurance recoveries, collateral and the timing of cash flows. The diagram in a presentation should be supported by the actual agreements and operating procedures.
Collateral must be usable when needed
A diligence review should establish what secures recoveries, who controls the security and what conditions govern access. Collateral value and legal availability are separate questions. The board needs advice on both, including the consequences of a dispute or deteriorating counterparty position.
Management should document how collateral requirements are recalculated as exposures and claims evolve. Review reporting delays, valuation assumptions and the escalation process for a shortfall. A requirement that appears adequate at inception can become less protective if the information used to update it is incomplete.
Stress tests should include a payment delay and a disputed recovery, rather than only final default. Identify which entity would provide liquidity while the issue is resolved and how that affects the captive and its parent. These are recommended tests, not findings that AM Best has made about a particular programme.
Retention and authority need examination
Front retention may affect incentives, but it should not be treated as a complete substitute for underwriting discipline. The review should explain who can accept business, change terms, settle claims and authorise exceptions. Where authority is delegated, the monitoring and withdrawal arrangements need to be credible.
Programme documentation should identify the information that reaches the front, captive and reinsurer. Inconsistent exposure or claims records can undermine all three parties’ understanding of the risk. Boards can request a reconciliation of key totals and an explanation of unresolved differences before relying on the dashboard.
Renewal and termination provisions deserve attention before a relationship is under pressure. Establish what happens to existing claims, records, services and collateral if a participant exits. The cost and feasibility of replacing a provider should form part of the continuity assessment.
Apply the lesson carefully to benefits captives
The published evidence concerns US property casualty business. It does not demonstrate an equivalent deterioration in employee benefits fronting or describe every pooling network arrangement. Benefits structures require their own assessment of local policy obligations, claims patterns, settlement mechanics and contractual protections.
For an employee benefits captive, group risk and finance teams should examine concentration across providers and countries. A single commercial relationship may cover several local arrangements whose legal and operational features differ. The review should retain those differences rather than compress them into one group level rating.
Independent non executive directors can challenge assumptions about recoverability, collateral and liquidity, and require documented responses to material exceptions. INEDs should also test whether conflicts within the group or provider relationships weaken the board’s ability to scrutinise the arrangement.
Require evidence before renewing
This editor recommends a renewal paper that connects each material exposure to the relevant counterparty, protection and contingency plan. Management should identify unresolved weaknesses and state who owns the corrective action and its deadline.
The value of the AM Best warning is to prompt specific questions. A captive board can use it to strengthen diligence while keeping conclusions grounded in its own programme, rather than importing a broad property casualty market concern as an established benefits market fact.
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