AM Best to investigate collateral arrangements regarding Vesttoo’s allegations
Written by Jane Frost
AM Best will review collateral arrangements at rated frontline insurers after fraud claims at Vesttoo, an insurer that links capital market participants to reinsurance risks.
“Although the details and scope of this issue remain unclear, AM Best monitors the rapidly evolving situation and reviews frontline insurers and other insurers that have significant amounts of reinsurance counterparty credit risk and rely on various forms of collateral,” AM Best said in a press release. Based on this review, classification actions will be taken as required.
Investors allegedly provided $4 billion worth of fake letters of credit to insurers for reinsurance transactions on the Vesttoo platform, Calcalist previously reported.
Vesttoo did not initially respond to a request for comment when contacted about the matter by Insurance Business.
In its update, AM Best noted that the level of security for reinsurance transactions will typically depend on the risk appetite of the reinsurance counterparty, as well as regulatory requirements. Guarantees can take various forms, with a letter of credit most often used, according to AM Best.
Other types of collateral can include fiduciary arrangements, garnished funds, alternative invested assets, or a combination of these methods.
“AM Best standards recognize that a reinsurance program must be appropriate to the insurer’s risk appetite and the program must be diversified and include reinsurers of good credit quality. In addition, we look at supports such as guarantees (for example, letters of credit) that protect assignment from counterparty credit risk,” the rating agency said.
In an analysis conducted in June 2023, AM Best found that 14 of the 19 companies analyzed ceded more than 85% of their business to reinsurers. This raised credit risk for counterparties to provide cover in a claims scenario, according to AM Best.
“If upfront risk is not properly assessed, the facing company could be exposed to residual tail risk, which could strain the collateral,” AM Best said. “The credit risk associated with reinsurers can be mitigated through the use of highly rated reinsurance bodies, limited exposure limits, regular review of guarantees and letters of credit, credit agreements, etc..”
AM Best said promising companies can demonstrate effectiveness and value through strong enterprise risk management practices, effective underwriting capabilities, focus on credit risk management, and enhanced reinsurance programs.
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