Vesttoo collateral fraud case could drive flight to quality: Fitch


Commenting on some of the happenings across the global reinsurance market today, in advance of next week’s Monte Carlo Rendez-Vous, rating agency Fitch said that it believes the Vesttoo collateral fraud case could drive a flight to quality and also reduce the use of letters-of-credit (LOCs) across the reinsurance industry.

Court action is ongoing, in the case of the alleged fraudulent or forged letters of credit (LOCs) connected to collateralized reinsurance deals that were facilitated by and had their capital sourced by Vesttoo.

But Fitch Ratings clearly expects the ramification to be widespread and potentially long-lasting, perhaps triggering a change in the way the industry operates, when it comes to LOC collateral.

“The investigation on possibly forged collateral linked to reinsurance deals facilitated by insurance technology facilitator Vesttoo Ltd. may decrease the usage of letters of credit (LOC) as collateral in the wider reinsurance market,” Fitch explained today.

The rating agency added that, “Fronting companies and managing general agents, whose business often relies on LOC, may face lower available capacity and tighter terms.”

There is already some anecdotal evidence of this occurring in the market, not least where some ceding companies have needed to source replacement reinsurance due to their exposure to letters of credit that proved to be invalid.

Of course, there is also an opportunity here for some capacity or capital providers to step in and offer efficient collateral to support MGA and fronting companies reinsurance needs.

Fitch Ratings went on to say that, “Other parties of the risk transfer chain will come under scrutiny by regulators, which may lead to a flight to quality along the value chain.”

The regulatory scrutiny is only just beginning, and while a bankruptcy case continues, at this stage it seems like the criminal investigations we should expect to see haven’t even really got started.

As a result, the whole Vesttoo sage could have a way to run and this could dent confidence in certain collateral providers and forms of collateral.

But, for the ILS market, the full-collateralization model will come out of this looking particularly robust, as it is hard to beat cash or liquid assets, like treasuries, held in trust, for counterparty security when it comes to backing reinsurance deals.

Read all of our coverage of the alleged fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.

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