Carriers get replacement capacity requests for billions of risk in Vesttoo fall-out

Across the market, carriers are receiving requests for replacement capacity to support billions in risk, in the wake of the Vesttoo-linked collateral fraud scandal, with some set to benefit from an unexpected opportunity to deploy more limit at a time of year when books are often relatively static, Artemis has learned.

Sources in the broking and underwriting community say that requests for replacement collateral are coming in via fronting companies that had utilised Vesttoo as a source of reinsurance capacity for clients, as expected.

But, demand is also being seen directly from some cedents and MGA’s, that are now suffering from a possible shortfall in valid collateral and so looking for alternatives.

We’re also told of a forward-pipeline of capacity needs for programs and cedents that had been planning on reinsurance capital facilitated by Vesttoo, but are now looking at alternative solutions.

We’re told reinsurance carriers that were regular supporters of the types of programs Vesttoo-linked collateralized reinsurance collateral had been backing, stand to benefit the most, as the business already fits their profile and they are familiar with the program capacity marketplace.

Names we’ve heard mentioned include the big four reinsurers, many from the Bermudian market, as well as others carriers that have historically had a specialism in some of the niche casualty programs from MGA’s, including Topsail Re, Safety National Re, IAT, MultiStrat, Odyssey and more.

In addition, we’re told the program specialist arms of major players such as Zurich, AXA and others, have also been receiving inbound enquiries.

Sources tell us that there will be challenges in securing replacement capacity, not least because this collateral letter of credit (LOC) fraud issue has appeared at a point in the year when many carriers have just finalised their mid-year renewal portfolios and were expecting things to remain relatively static through the rest of 2023.

Another challenge expected to face those seeking replacement capacity and coverage, is the cost of doing so.

Many of these reinsurers already appeared on programs that had Vesttoo facilitated collateral participating, but the terms for the reinsurers were often said to have been more beneficial to them, potentially more onerous to the cedents.

One source told us that, if they are to take up any of the lines that had been put down via Vesttoo, it would only do so at different terms, that would effectively push more risk back to the cedent.

It seems the terms that Vesttoo-facilitated reinsurance deals had been offered at in the market were often more favourable to the cedent, as the belief was that capacity could be deployed more efficiently using the technological approach, with backing from capital markets.

Other sources suggest that these lines that are now being made available are likely to get filled, as cedents must fill out their programs and replace affected collateral.

But, more interesting to watch, they say, will be the renewal process, when these programs go back to the reinsurance market, facing terms that could be much more onerous.

One trend that is emerging, we hear, is that some of the cedents involved are looking for either balance-sheet players that retain some of the risk, rather than a pass-through solution to reinsurance capital, or a solution that sees a true collateralized option with a fully-validated collateral source.

Overall, there is said to be a bit of a flight-to-quality ongoing, in the program reinsurer space.

Another insight we’ve learned, is that while there are reports of a higher frequency of requests coming in for letter of credit (LOC) validation in the market, perhaps surprisingly this has not been as widespread as you might have thought.

Some had expected LOCs to come under significant scrutiny. Until there is some official word as to where the Vesttoo-linked collateral fraud actually emanated from, it is hard for other users of LOCs, especially from the banks that have been named, to know the validity of their own.

It seems the market may be in a holding pattern here, as it waits for more definitive information as to the ultimate source of any fraud of forgery of LOCs, before launching a larger investigation into whether this could reach more widely than just Vesttoo-linked deals, or is contained to their reinsurance capacity sources.

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