The Vesttoo saga, which entails allegations of fraudulent letter of credit (LOCs), “highlights the importance of carefully managing counterparty credit risk,” as it has now become clear that the bank at the heart of the situation grew LOC issuance significantly in 2022, according to analysts at AM Best.
Amid the ongoing turmoil, AM Best’s analysts have surveyed reinsurance counterparty credit risk and the forms of collateral held by U.S.-domiciled insurers in statutory filing statements.
Despite not being able to identify which bank LOCs are related directly to Vesttoo transactions, AM Best said a broad analysis “shows that LOCs against business with unaffiliated reinsurers account for 22% of total collateral held.”
The rating agency noted that 2021-2022 data also shows insurers have added some new banks to their roster of LOC providers, and that the growth in LOCs by some banks “has been notable.”
As per AM Best, this is particularly prominent at China Construction Bank Corp., which increased its LOC exposure by $1.2 billion in 2022 and is the main bank named in relation to the fraudulent LOC scandal involving the insurtech Vesttoo.
The rating agency said that the data also shows companies with LOC exposure to China Construction Bank Corp. now totals nearly $1.3 billion for the U.S. insurance industry.
AM Best stated that it is monitoring the situation and reviewing its rated fronting carriers, as well as other insurers that have material amounts of reinsurance counterparty credit risk and reliance on various forms of collateral.
Based on this review, rating actions will be taken as warranted, the rating agency explained.
In related news, in a white paper for its clients, ALIRT Insurance Research outlined its difficulty in understanding how the alleged fraudulent LOC issue surrounding Vesttoo was missed by different participants in the chain.
ALIRT added that all of the parties involved, from wholesale brokers, their reinsurance broker partners, the issuing insurers and their reinsurance counterparties, as well as Vesttoo, “bear some responsibility for this mishap.”
The insurtech recently filed for Chapter 11 bankruptcy protection in the U.S., as it looks to protect its assets and aggressively pursue legal action against all parties responsible for the fraudulent LOC saga.
At the time, Vesttoo explained that with the protection this offers, it’s platform and current capital structure remain both stable and fully sustainable.
Vesttoo has since confirmed that both the federal court in New York and the courts in Israel have removed temporary restraining orders freezing its assets. The firm has also stated that the investigation into fraudulent LOCs is advanced, and that it hopes to be able to publish the results in the near future.
