Vesttoo collapse (fraudulent reinsurance collateral)

In July 2023 Vesttoo suspended operations. The letters of credit behind its obligations to fronting carriers such as Clear Blue Insurance and Trisura, supposedly issued by Chinese banks, turned out to have no record at those banks, and the amount at stake ran past a billion dollars. The Israeli platform, founded in 2018, sold collateralized reinsurance: the reinsurer has no rating to offer, so it posts security instead, and the cedent relies on that security to take credit for the cession on its balance sheet. In a fronting deal the carrier that issues the policy keeps the counterparty risk. So it was the fronts that had to reclassify their reinsurance recoverables, book charges and scramble for replacement security. Vesttoo hired outside counsel to investigate and then sought protection under US bankruptcy law. Trust-based collateral, the kind that sits behind cat bonds and sidecars, was never called into question. The weak link was the bilateral letter of credit, which few cedents checked beyond the document they were handed, with no call back to the issuing bank.