An initial policy is a risk management technique in which an insurer underwrites a policy to cover a specific risk, but then transfers the risk to a reinsurer. Initial funding policies, which are a type of alternative risk transfer (ART), are the most used by large organizations. Because the reinsurer assumes all the risk of the policy, it maintains full control over the claims process. For the insurer that provides the paper as the front side, the front side can generate revenue.
It gives the company the opportunity to benefit from the initial fees without assuming substantial risk, but rather lending its role and, to a certain extent, its capital. There is an additional use of the facade when the captive, usually a single-parent captive, acts as the main company and issues a policy directly to the insured parent company. When this occurs, the risk is fully reinsured to one or more domestic or foreign reinsurers. As a result, the main captive company would not retain any of the risks and the parent company has been able to access the reinsurance market.
Reinsurers would not have been able to legally amortize the risk directly. Fronting is most often understood as when a transferor company (insurance company) underwrites a policy and transfers all risk to a reinsurer.