Rating agency AM Best has said that it will review the collateral arrangements of all fronting companies that it provides ratings for, in light of the claims that collateral involved in transactions facilitated by Vesttoo could be fraudulent.AM Best said it is “Monitoring the rapidly evolving situation and reviewing its rated fronting carriers and 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 added.With , there is a risk to fronting specialists that capacity is not there to support the functioning of client programs.Fronting specialist , so any exposure to collateral issues at the insurtech is “immaterial.” While fronting firm , but that the company may seek out more reinsurance to protect its surplus and capital.

Most recently, program fronting player AM Best noted that when it reviewed fronting carriers recently it found that “14 of the 19 companies analyzed ceded more than 85% of their business to reinsurers, resulting in elevated credit risk on counterparties to provide cover when claims arise.” The rating agency stated, “If risks are not initially assessed properly, the fronting company can be subject to residual tail risk, which could strain the collateral.Credit risk associated with reinsurers can be mitigated through the use of highly rated reinsurance panels, tight exposure limits, a regular review of collateral and letters of credit, trust agreements, etc.Effective fronting companies demonstrate their value through robust ERM practices, strong underwriting capabilities, effective reinsurance programs, and a focus on managing credit risk.” AM Best also noted that the “details and scope of this issue remain unclear” but said the quality and support of collateral is always part of its reviews of carriers reinsurance arrangements.

Recall, that AM Best recently provided a preliminary investment grade rating to the recent offering of notes.Those notes are now not going to be issued, we understand.We’re told that AM Best is not the only entity now reviewing collateral arrangements, in light of the news of potentially forged letters of credit (LOC) finding their way into the market, with brokers and other firms assessing client reinsurance arrangements to ensure their integrity.

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