AM Best will review collateral arrangements at rated fronting insurance companies following fraud claims at Vesttoo, an insurtech that connects capital markets participants with reinsurance risks.
“Although the details and scope of this issue remain unclear, AM Best is monitoring the rapidly evolving situation and reviewing fronting carriers and other insurers that have material amounts of reinsurance counterparty credit risk and reliance on various forms of collateral,” AM Best said in a press release. “Based on this review, rating actions will be taken as warranted.”
Fake letters of credit valued at $4 billion were allegedly provided by investors to insurers for Vesttoo platform reinsurance transactions, Calcalist has previously reported.
Vesttoo did not initially respond to a request for comment when approached on the matter by Insurance Business.
In its update, AM Best flagged that the level of reinsurance transaction collateral will typically depend on a cedent’s reinsurance counter-party risk appetite, in addition to regulatory requirements. Collateral can take different forms, with letter of credit often used, according to AM Best.
Other types of collateral could include trust arrangements, funds withheld, alternative invested assets, or a mix of these approaches.
“AM Best’s criteria recognizes that a reinsurance program should be appropriate to an insurer’s risk appetite and the program should be diversified and include reinsurers of good credit quality. In addition, we look at support such as collateral (e.g., letters of credit) that protects the cedent against counterparty credit risk,” the ratings agency said.
In a June 2023 analysis, AM Best found that 14 of 19 companies analyzed ceded more than 85% of their business to reinsurers. This resulted in an elevated credit risk on counterparties to provide cover in a claims scenario, according to AM Best.
“If risks are not initially assessed properly, the fronting company can be subject to residual tail risk, which could strain the collateral,” AM Best said. “Credit risk associated with reinsurers can be mitigated through the use of highly rated reinsurance panels, tight exposure limits, a regular review of collateral and letters of credit, trust agreements, etc.”
Fronting companies can demonstrate effectiveness and value through strong ERM practices, effective underwriting capabilities, focus on credit risk management, and bolstered reinsurance programs, AM Best said.