Best reviewing insurers’ collateral over Vesttoo concerns

Rating agency A.M. Best Co. Inc. said Tuesday it is reviewing fronting insurers and other insurers that heavily rely on collateral in the wake of reports of alleged fraudulent letters of credit provided by a bank associated with online reinsurance intermediary Vesttoo Ltd.

In a statement, the Oldwick, New Jersey-based rating agency said that although the scope of the issue remains unclear, it is “reviewing fronting carriers and other insurers that have material amounts of reinsurance counterparty credit risk and reliance on various forms of collateral. Based on the review, rating actions will be taken as warranted.”

Last week, Vesttoo, which connects cedents with investors for noncatastrophe insurance-linked securities and collateralized reinsurance coverage, said it was looking into “inconsistencies” in its operations in the wake of news reports of alleged fraud involving letters of credit for reinsurance transactions it was involved in.

Vesttoo continues to investigate its operations, a Vesttoo spokesman said in an email Tuesday.

“The company is doing all it can to determine how and where the fraudulent LOCs originated. At a minimum, it appears that Vesttoo’s procedures were circumvented,” he said.

The company is communicating with investors, banks and cedents on the issue, the spokesman said.

Fronting insurer Clear Blue Insurance Group said Monday that it will no longer accept capacity via Vesttoo.

The level of collateral used in reinsurance transactions depends on cedents’ reinsurance counterparty risk appetite and regulatory requirements, the Best statement said.

“A.M. 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,” Best said.