Fronting Policy

You buy insurance from one company. However, another company takes all the risk. The first company just signed the policy and immediately passed it on to someone else. It gets a share of the premiums, but isn't on the hook if you ever make any claims. It's the fronting company.

You plan to make a solo hot air balloon trip around the world. You hire an insurance company to cover the endeavor.

However, your last three ballooning adventures have ended in disaster. Last time, the insurance company had to pay to fish you out of the Pacific Ocean.

So the insurer decides it wants nothing to do with the situation. It contacts a reinsurance company. The reinsurer agrees to take on the entire risk, essentially taking over the policy. The first insurance firm gets part of the premium for writing the deal, but the reinsurer takes on all the risk.

A typical fronting arrangement is more of a sales process. The setup is similar to that of a mortgage originator, who agrees to a mortgage, but then almost immediately sells it to another financial institution.