Fallout from the Vesttoo collateral scandal may “delineate” the traditionally stable fronting insurance sector, according to Trisura president and CEO David Clare. But he said a diversified portfolio would be a key differentiator for fronting carriers and help mitigate any credit risk.
Clare addressed the potential impact of multi-billion-dollar collateral fraud allegations against the embattled insurtech during a Q&A with analysts.
“Any time events like this happen, there is volatility and there are questions in the market. It's still pretty early days to see anything material or commercial happening,” he said. “What I would say is that these types of events may delineate some parts of the fronting market.”
Vesttoo, which has reportedly sought Chapter 11 bankruptcy protection, has come under intense scrutiny after it uncovered potentially fraudulent letters of credit (LOCs) provided to insurers for reinsurance transactions on its platform.
Following an internal investigation, the Israel-based startup blamed the problems on external banks and financial institutions.
After closing several offices in Asia, laying off three-quarters of its staff, and replacing its chief executive, Vesttoo has initiated bankruptcy protection proceedings in the US earlier this week.
Ratings agencies have warned that fronting insurance companies with significant exposure could face ratings action and a weakening of their credit profiles on the back of the scandal.
Commenting on the crisis, Clare said replacing forms of collateral would be “relatively easy.”
“Traditionally, if you're replacing forms of collateral, [such as] if you're substituting other financial institutions, it's a relatively easy switch,” Clare said.
“[It would] depend on the reinsurance relationships with financial institutions and who they select as partners. Collateral can take a lot of forms, including withheld premiums and cash, and relationships with financial institutions can be switched out to the extent that they need to be.”
Clare was confident that the ongoing turmoil wouldn’t impact Trisura’s fronting business.
The company’s diversified set of counterparties, including both reinsurers and distribution partners, and a combination of businesses would help it stand out amid volatility, according to the CEO.
“We're not just a fronting company in the US,” he said. “Our funding platform is part of a larger organization, including a Canadian entity that has demonstrated strong growth and probability for over a decade. The size and scale of our entity is a little different than other participants in the market.”
Trisura reported a 43% revenue increase in the second quarter of the year, at $664.4 million in insurance revenue. Strong underwriting performance by the specialty insurer also contributed to a combined ratio of 82.9%.
Do you have any thoughts about the broader impact of the Vesttoo fraud scandal on the fronting market? Tell us in the comments.
