Concept
In insurance, you can issue policies under someone else's license. An MGA (managing general agent), also known as a coverholder, receives delegated underwriting authority—the right to underwrite and issue policies on the "paper" of a licensed insurer under binding authority. In the Lloyd's market, this is a coverholder working with a managing agent. This is the insurance vertical of the same license-rental pattern as BaaS in banking, agents in payments, and host AIFM in funds—general overview in embedded finance.
Fronting is when a licensed fronting carrier provides the "paper" (a policy under its license and rating), while the insurance risk is transferred through reinsurance to a reinsurer or to a proprietary captive. The MGA brings in and services the business; the carrier provides the license and rating; the risk is held by whoever reinsured it.
🍓 The carrier-insurer is responsible for the program before the regulator, not the MGA (this is how NAIC supervision is structured). After the Vesttoo scandal (2023, approximately $4 billion in fake letters of credit securing reinsurance), regulators require fronting carriers to maintain operational control over programs and rigorous verification of collateral.
How It Works
Three roles. The MGA sells, underwrites within the mandate, and services policies and claims. The fronting carrier issues the policy under its license and A-rating, so the policy is accepted by clients and counterparties. The reinsurer or captive assumes the economic risk. Everything is tied together by binding authority (binder)—an agreement that describes exactly what the MGA is authorized to sign on behalf of the carrier.
What You Need to Launch
The MGA must be a licensed producer and hold a separate MGA license (by state). You cannot conduct business without written contracts with all parties. You also need a fronting carrier and binder, errors and omissions insurance (E&O), and a surety bond.
| Element | Requirement |
|---|---|
| Licenses | producer + separate MGA license (by state) |
| E&O (errors & omissions insurance) | $250K or 25% of direct written premium from the previous year—whichever is greater |
| Surety bond | per NAIC Model Act; around $50K or 10% of premiums handled (depends on state) |
| Contracts | written agreement with all parties—business cannot be conducted without it |
| Infrastructure | fronting carrier + binding authority (binder) |
Compliance
Obligations are defined by the binder: permitted lines, territory, limits, commission rates, bordereaux reporting (regular registers of issued policies and claims), carrier audit rights, and termination conditions. The carrier is obligated to substantively control the program: verify underwriting, reporting, and claims settlement, as well as collateral for retained risk. After Vesttoo, collateral verification and operational oversight have been tightened.
How It's Done in the Market
Fronting carriers commonly used to open programs: Clear Blue, Trisura, Accredited (R&Q), State National (Markel), Transverse (MSI), Knight, Sutton National. Economics: commissions make up around 60–80% of MGA revenue; retail commission is 10–15% of premium plus override; the fronting carrier charges a fronting fee and requires collateral for retained risk.
What to look for when choosing a fronting carrier: rating and admitted/non-admitted status (determines where you can sell), collateral requirements, depth of operational control (higher after Vesttoo), binder terms—audit and termination, willingness to work with your lines and volumes. Delegated authorities at Lloyd's and fronting practice provide guidance on deal structure.
Applicable Regulation
The foundation is the NAIC MGA Model Act (producer + MGA license, E&O, surety bond, mandatory written contract) and state insurance law; in the Lloyd's market—the delegated authority regime (coverholder with managing agent). The Vesttoo lesson has been embedded in supervision: collateral verification and carrier operational control over the program. Where the regulatory perimeter is heading overall—in the article on regulatory perimeter trends.
| Pros | Cons |
|---|---|
| Issue policies without your own insurance license and capital for risk | The carrier is responsible for the program before the regulator; it controls tightly |
| Access to the fronting carrier's license and rating | Fronting fee and collateral requirements reduce economics |
| High share of commission in MGA revenue (60–80%) | Dependence on carrier and reinsurer; binder can be terminated |
| Flexibility on lines and territories through binder | After Vesttoo—higher collateral and operational oversight requirements |
Q/A
Do you need your own insurance license to open an MGA
A full insurer license—no. You need a producer license and a separate MGA license by state, and policies are issued on the "paper" of a fronting carrier under binding authority. A written contract with all parties is mandatory.
Who bears the insurance risk in fronting
Not the fronting carrier economically, but the reinsurer or proprietary captive to whom the risk is transferred. The carrier provides the license and rating and is responsible before the regulator, so it requires collateral for retained risk.
What did the market learn from the Vesttoo case
In 2023, fake letters of credit totaling approximately $4 billion, issued as collateral for reinsurance, were uncovered. After this, regulators and carriers tightened collateral verification and require operational control over programs, not just providing "paper."
This material is prepared as an expert overview and does not constitute individual legal advice.
FAQ
Who bears the insurance risk in fronting
Not the fronting carrier economically, but the reinsurer or proprietary captive to whom the risk is transferred. The carrier provides the license and rating and is responsible before the regulator, so it requires collateral for retained risk.