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All parties exposed to Vesttoo-linked collateral issue bear some responsibility, says ALIRT


ALIRT Insurance Research has concluded that, ultimately, all of the parties exposed to the alleged fraudulent LOC issue engulfing insurtech Vesttoo bear some responsibility, stating that it’s “difficult to fathom” that the fraud was “able to evade multiple levels of due diligence”.

vesttoo-collateral-safeThe insurance research entity has sent a statement to clients explaining that it’s been closely following the fall-out from the allegations that some LOCs used to back reinsurance for programmes sourced by Vesttoo are fraudulent.

ALIRT has also released a white paper for its clients on the matter, which reviews the ongoing situation and provides a list of carrier exposures to the potential LOCs believed to have been issued by the Chinese Construction Bank Corporation (CCB).

The paper concludes that, “All of the parties exposed to the recent fraudulent LOC’s – wholesale brokers (Managing General Agents and Program Managers), their reinsurance broker partners, the issuing insurers and their reinsurance counterparties, as well as the Vesttoo platform itself – bear some responsibility for this mishap.”

“While we concede that this was likely a well-designed fraud, it is difficult to fathom that it was able to evade multiple levels of due diligence purportedly carried out by these different participants. That is, unless corners were being cut in the race to place premium into difficult corners of a difficult P&C market,” continues ALIRT.

This is what concerns ALIRT, given that most of the impacted carriers are relatively newly established fronting-type firms, while numerous insurtechs have also been “stung” by recent developments.

“ALIRT concludes that with the frenetic growth of specialty insurers/distributors over the past five years, it is possible that proper due diligence/enterprise risk management has become lax,” says the firm.

The company adds that it expects losses “will certainly be taken” as affected insurers and reinsurers look to replace any fraudulent LOCs.

ALIRT highlights Porch Group’s realised charge of $48.2 million in its second-quarter results because of its exposure to reinsurance contracts arranged via Vesttoo, warning that this will “certainly be painful for a company that reported $76 million of surplus” at the end of 2022.

“We have already seen two missteps out of this sector of the market over the past year, including fake policies issued by James Allen in 2022 and the aforementioned collateral dispute costing fronting specialist Trisura tens of millions of dollars earlier this year. Now this. One wonders if there will be more,” states the white paper.

As the investigation into the fraudulent LOC claims continues, ALIRT says that it remains “laser-focused on the rapid growth of many of these relatively recent start-ups (especially in the fronting sector), which will necessitate either on-going surplus support from parents, substantial dependence on reinsurance, or both.”

“ALIRT’s analyses necessarily focus on the balance sheet of insurers as they evolve from quarter to quarter, including importantly an insurer’s surplus exposure to operational mishaps such as unrecoverable reinsurance payments,” adds the firm.

The company also notes that with current ALIRT Scores of many of the carriers exposed to “the CCB LOC fiasco” being towards the lower end of its historically normal range, or even below, they have less room for mistakes.

“With the A.M. Best A- rating so liberally distributed to start-ups in recent years, we suggest that clients continue to closely track the ALIRT profiles of any of their newly-minted specialty insurance partners,” concludes the paper.

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

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