Fronting companies to engage more frequently with ILS market: AM Best

Rating agency AM Best has indicated in a new report that fronting companies are expected to engage more frequently with the insurance-linked securities (ILS) market to drive capacity diversification using catastrophe bonds, sidecars and collateralized reinsurance structures.

In its report, AM Best notes that the property and casualty fronting market continued to grow at a healthy rate during 2025, driven in part by the sustained expansion of MGA-oriented business.

The agency highlighted how fronting has expanded over time to include much broader sets of entities, such as managing general agents (MGAs). The agency further clarified that over the last couple of years, there has been a trend for some fronts to assume business from a variety of entities, including other insurers, reinsurers, and state facilities.

Data from the report shows that as of year-end 2025, market estimates suggest upwards of $30 billion of US P&C insurance industry premium is fronted, which heavily showcases how the fronting market has continued to grow at a rapid pace.

“As of year-end 2025, the fronting specialists assumed premium totaled $4.8 billion, up significantly from the $1.8 billion recorded in 2024. Of the $4.8 billion in assumed premiums written in 2025, about $1.7 billion was unaffiliated assumed premium, representing written premium that would present a different risk profile for these fronting companies since it is business initially underwritten by other companies,” AM Best explained.

The agency further noted that capacity diversification is likely to persist, as fronting companies are expected to engage with the insurance-linked securities market on a more frequent basis.

“For ILS investors, fronting companies act as efficient transformers so they can access risks through rated insurance companies directly, getting them closer to the risk,” AM Best said.

“These transactions offer a different risk profile compared to the traditional catastrophe risks that make their way to the ILS market. The differences in risk profile also creates uncertainties. While catastrophe risks are typically short-tailed, these risks are longer-tailed, incorporate investment assumptions, and adverse reserve developments and loss estimates could lead to operational conflicts between the fronting company and the investors.

“Fronting companies would also need to have specific fall-back plans on what to do after the commutation date.”

In recent years, fronting has become a common practice in the ILS market.

Investors and ILS funds team up with fronting insurers to access risk more efficiently, simultaneously leveraging the fronting provider’s established credit rating, while utilising the provider’s ability to hold onto the tail risk associated with the transaction.

The report further explained that MGAs are drawn towards fronting companies due to reinsurance efficiency and optionality, while simultaneously highlighting multi-year capacity stability, accelerated product development and distribution capabilities, and enhanced access to reinsurance and the capital markets as key advantages.

As the capital markets provide substantial alternative pools of liquidity, this allows MGAs to underwrite larger volumes of business and access capacity for bigger risks than traditional insurance capacity would normally allow.

The rating agency also observes that the majority of fronting companies are capital light vehicles backed by private equity.

“Almost half of the fronting organizations are owned by private equity, which has been attracted by the fee-based revenue, capital-light vehicles, and limited balance sheet risk. The breadth of the other owners, which include insurance companies, brokers, and private individuals, also speaks to the attractiveness of the market,” AM Best said.

Given that private equity firms prioritise high returns on equity, capital-light vehicles are ideal as they allow fronting companies to generate steady, fee-based income by passing the majority of insurance risk along to reinsurers rather than holding it on their own balance sheets.