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.
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Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
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