Back-To-Back Deductible

A back-to-back deductible is a feature of an insurance policy under which the deductible equals the policy amount. This is a type of a fronting policy, in which the insured covers any damages and thus relieves the insurer of any risk.

A back-to-back deductible allows a policyholder to essentially self-insure with the assistance of a licensed insurance provider. It is also sometimes referred to as a matching deductible. The policyholder assumes the burden of covering any claims against itself, since the deductible is identical to the value of the policy.

Under such an arrangement, the insurance carrier can also be known as a fronting company. This company underwrites the insurance contract and ensures the policyholder’s ability to pay any claims. The carrier generally does not expect to pay any damages on behalf of the insured. This fronting arrangement may appear to skirt state insurance regulations, particularly because the true liability lies with an unlicensed and unregulated entity. In most cases, courts have allowed fronting arrangements to exist because the licensed fronting company is ultimately responsible for the insured company’s ability to cover claims and losses.

A deductible which equals the value of a policy can also be a feature of a captive insurance agreement. A captive insurance provider is owned and operated by its own clients. This is similar to a mutual insurance company, except that in the mutual insurance arrangement the policyholders do not exercise control over the insurance business. Also, participants in a mutual insurance organization receive dividends from any profits that the insurance may produce.

In practice, a captive insurer typically has only one client. A large corporation seeking to manage insurance requirements and tax liabilities across multiple jurisdictions will often establish a captive insurer as a wholly-owned subsidiary to address these issues. These firms are willing to put their own capital at risk and, ideally, to reap the benefits of not exposing themselves to the costs of the traditional commercial insurance marketplace. To do so, a company will establish a captive insurer with a two-part tax benefit. First, the premiums paid by company to its own captive insurer are often tax-deductible. Second, these subsidiaries are often established in overseas tax havens where profits are taxed at a much lower rate than they would be domestically.

A back-to-back deductible is an indication of either a fronting policy or a captive insurance arrangement. Both are legal examples of alternative risk transfer, the management of risk outside of the traditional commercial insurance marketplace. In both cases, the back-to-back deductible model results in an company's election to self-insure against claims or losses that would normally be handled by an outside insurance carrier.