A front-end policy is a risk management technique in which an insurer takes out a policy to cover a specific risk, but then assigns the risk to a reinsurer. Fronting policies, which are a type of alternative risk transfer (ART), are most often used by large organizations. Since the reinsurer assumes the entire risk of the policy, this retains full control over the claims process. The main purpose of front-end insurance is to allow the captive or organization to issue policies in states where it is not authorized. Other objectives are to comply with insurance regulations and provide the captive with access to other services such as claims processing and the ability to transfer excess risk in a cost-effective manner. The company that subscribes to the initial policy is the front-end company and receives part of the premium, although all the risk is transferred to the reinsurer. However, if the prisoner or self-insured person does not pay compensation (for example, insolvency due to a massive loss), the front-end company must comply with the policy. As a result, the façade company assumes the risk and charges a fee for this service. Fees are usually paid as a percentage of the premium. A front company is a business unit that sells an insurance product but transfers the risk to another company.
It is able to do so because the company taking the risk is not allowed to sell a similar product in this area. For the main insurance company, fronting is often used as a flexible market strategy that generates revenue without taking significant risks. This additional source of capital can be used for staff increases, system upgrades, or other expenses. In addition, the considerable financial and technical support of a reinsurer allows a front-fronting company to gradually open up a new field of insurance. Fronting can also be a way to leave a new industry if it is not profitable for the fronting company in the long run. According to the new codes of conduct, fronting is now punishable. Companies found guilty could face a fine of up to 10% of their annual turnover, and directors can be fined in their personal capacity and up to ten years in prison. In addition, these companies are not allowed to do business with government agencies for a period of ten years, which affects the tendering process. The insurance company that covers the original policy is called a façade company. This company receives a percentage of the premium, although it assigns all the risks to the reinsurer, who is responsible for all claims made against the policy that it now effectively controls. The only function of the insurance company, apart from underwriting and assigning the original policy, is to ensure that the reinsurer is in a tax position to settle any claim that may arise to him. To be clear, the insurance company itself never pays any of the claims in this type of agreement.
A good BBBEE rating can bring many benefits to a company operating in South Africa. These include the ability to participate in preferred purchases, the ability to bid with government and large organizations, a progressive public image that can be used in marketing strategies to attract new customers, and an advantage over competitors. Although compliance with BBBEE is not mandatory under South African law, it is highly recommended and can enhance a company`s success. As a result, many people want a BBBEE certificate – and some are willing to go to great lengths to get it. Some companies have used dishonest means to get the desired opinion. According to the B-BBEE Codes of Conduct, fronting is now recognised as a criminal offence. If convicted, companies can face a fine of up to 10% of their annual turnover or up to 10 years in prison. Another sanction could be that companies would be banned from doing business with the government for a period of 10 years. The B-BBEE Commission was established in June 2016, among other things, to monitor compliance with the B-BBEE Act, with extensive powers to investigate façade practices and misrepresentations, and even to declare a particular practice a frontal practice. It`s important to remember that by helping blacks integrate into the mainstream of economic activity, the companies that do so must benefit. .