In response to recent fraud claims at Vesttoo, an insurtech connecting capital markets with reinsurance risks, AM Best, the renowned ratings agency, has initiated a comprehensive review of collateral arrangements in rated fronting insurance companies. While the full extent of the issue remains unclear, AM Best is closely monitoring the rapidly evolving situation and assessing fronting carriers and other insurers with significant exposure to reinsurance counterparty credit risk and reliance on diverse forms of collateral.
According to Calcalist’s previous report, fraudulent letters of credit valued at $4 billion were allegedly provided by investors to insurers for Vesttoo platform reinsurance transactions. Vesttoo has not yet responded to the matter when approached by Insurance Business.
In its update, AM Best highlights that the level of reinsurance transaction collateral typically depends on a cedent’s risk appetite and regulatory requirements. Collateral can take various forms, with letters of credit being a common choice.
AM Best’s criteria emphasize the importance of a well-suited reinsurance program aligned with an insurer’s risk appetite and diversified with reinsurers of good credit quality. Support mechanisms like collateral, such as letters of credit, play a crucial role in protecting the cedent against counterparty credit risk, as stated by the ratings agency.
A June 2023 analysis by AM Best revealed that 14 out of 19 companies analyzed ceded more than 85% of their business to reinsurers, posing elevated credit risk on counterparties in potential claims scenarios.
To mitigate credit risks associated with reinsurers, AM Best recommends using highly rated reinsurance panels, tight exposure limits, regular reviews of collateral and letters of credit, trust agreements, among other measures.
AM Best underscores that fronting companies can demonstrate their effectiveness and value through strong Enterprise Risk Management (ERM) practices, efficient underwriting capabilities, a focus on credit risk management, and robust reinsurance programs.
