Vesttoo controversy sparks capital concerns for wider re/insurance market

The  Vesttoo controversy could weaken confidence in collateralised reinsurance, potentially leading to reduced capital availability for the industry, ratings agency DBS Morningstar has cautioned.

In a commentary on its website last week, Morningstar said the widespread issues with letters of credit (LOC) in the Vesttoo platform have ramifications for the broader insurance and reinsurance market, especially for fronting specialist companies and insurance brokers arranging these deals, involving multiple cedents.

Vesttoo, which is based in Israel and has offices in Bermuda, London and New York, has confirmed that it has discovered at least two transactions involving allegedly fraudulent LOCs provided to insurers by investors for reinsurance transactions within the Vesttoo platform.

It has said that all of the disputed LOCs used the name of China Construction Bank, which appears to have been unaware of the situation.

Vesttoo, headed by chief executive officer Yaniv Bertel (pictured), has contracted a third-party law firm to conduct an audit of its transactions to determine the scope and scale of the problem. It is also working to secure new investors for the cedants who have been affected so far. It has stated that its procedures appeared to have been circumvented.

Vesttoo acted as an intermediary between insurance cedants and investors, primarily in the insurance linked securities sector. Its platform used artificial intelligence to model the risk to investors and then connected cedants.

Investors could produce cash, highly liquid securities or standby LOCs as collateral for their investments.

Morningstar said it was not clear how much exposure there is to the fraudulent LOCs, but it estimated the total size of Vesttoo’s outstanding transactions to be between $5 billion and $10 billion based on the Company's total revenue of approximately $200 million in 2022.

It added: “Several insurance companies have already suspended further transactions in the Vesttoo platform until their investigations are complete.”

Morningstar also commented on the level of risk to cedants.

It said: “Nevertheless, cedants can only use the reinsurance capacity issued through the Vesttoo platform following the occurrence of a valid claim. More importantly, the reinsurance capacity placed through the Company is mostly for non-catastrophic risks, reducing the industry's systemic risk. In the meantime, the cedents involved with the platform are verifying the validity of the standby LOCs received from investors.

“Alternatively, cedents can request a replacement in collateral, including standby LOCs from different banks. If this is not possible, cedents could place existing transactions with better-rated traditional reinsurers but likely at a higher cost.

“For cedants where Vesttoo accounts for only a small fraction of their reinsurance strategies, we expect any fallout from collateral failure to remain manageable.

“However, some fronting insurance companies (insurers that typically retain a minimal portion of the insured risk and reinsure out the rest) have more significant exposure to Vesttoo and could see a weakening of their credit profiles in the short to medium term.”

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