Citadel Risk’s fronting business growing in Latin America

Fronting is able to unlock huge potential for companies in Latin America, says Tony Weller, group chief executive, Citadel Risk. Until now, word of the company’s fronting services has largely spread through the region by word of mouth but now they are at FIDES to broaden people’s knowledge of what they can do.

Citadel Risk has been around for 40 years and has an A- rating from AM best, giving it a strength that is appealing to a lot of smaller Latin American carriers, enabling them to write business that would otherwise be prohibited.

A large part of Citadel Risk’s fronting business, says Mike Palmer, head of London operations, is focused around captives. A typical scenario is that a company has a well established captive in Bermuda but the local regulators in South America prohibit ceding reinsurance to a non-rated entity, however well-capitalised it is. In such situations the business can flow through Citadel Risk, who can retrocede it to the captive, providing the regulators with the assurances they need and the company with ceding options that would not otherwise be accessible.

“This is an increasingly popular solution in a region where captives are fast gaining ground,” adds Weller.

“The captive market in Latin America has really taken off, so when you go to captive conferences these days, they are quite well attended by the Latin American market. Captives are popping up pretty much all over the region, especially in Mexico. They are a popular way for companies from the larger countries in Latin America to be able to manage their own risk.

“In the last few years Latin America has become a huge source of opportunities for captive managers, and when that happens there are reinsurance requests which flow through to us.”

“Citadel Risk’s fronting service is also in demand from re/insurance companies that are very well capitalised but do not have a high enough rating to do certain business,” says Palmer.

“It might be because they are quite new companies or because of their country’s sovereign rating: for example, you might have a company in Ecuador which is well capitalised but has a poor rating because the rating agency cannot give a rating better than Ecuador’s sovereign rating.

“It’s a disadvantage that insurance and reinsurance companies have to operate with and we can help them out if the business flows through us. Every deal is unique; everyone has a different reason why they want an A- rated front.”

The main classes of business Citadel Risk is currently fronting in the region are accident, health and life insurance, as well as some property. It also fronts credit risk business for banks. Most of its business from the Latin American market comes through word of mouth recommendations. Whatever a company’s reason for approaching Citadel Risk, it can expect to experience a stringent due diligence process.

“We always make sure we look at the proposition as if we were taking the risk ourselves. I want to be sure that it’s good business, that it makes sense and that it’s something I would want to write myself,” says Weller.

“We like to see fully audited and unqualified audit reports and actuarial reports. Citadel Risk has its own hoops to jump through: in nine or 10 of the Latin American countries, it has to go through an extensive licensing process in order to do business there, but the result is that it can now offer its services across the region, in all but a couple of countries.

“At FIDES there’s a good chance that if somebody wants us to help them out then we can. We’ve built our business in the region up slowly; for example, we are regulated in Colombia now but we weren’t two years ago. It’s an economy that had problems in the 1980s and 1990s but it has emerged as a strong, well governed country. Sovereign risk is disappearing and so things are moving there.”

Palmer sees opportunities emerging not only in Colombia but across the region, with enquiries coming from Mexico and Ecuador and companies in smaller countries such as El Salvador and Guatemala also showing an interest.

As Citadel Risk increases its presence in the area, Weller’s priority is to grow the business in a controlled manner.

“We’re not interested in uncontrolled growth, and we are careful to ensure that we fully understand and can maintain our programmes. We see a lot of opportunity in Latin America, and while our business in the region will reach a limit at some stage, we’re not there yet.”

Tony Weller is group chief executive at Citadel Risk. He can be contacted at:  tony.weller@citadelrisk.com

Mike Palmer is head consultant, London operations at Citadel Risk. He can be contacted at:  mike.palmer@citadelrisk.com