INSURANCE MARKET BAROMETER: Q4 2023
In this article, Paul Hughes, Principal at Libertate, provides an insightful overview of the 2024 insurance landscape, analyzing recent market events and projecting future trends.
“As we prepare to enter 2024, here is a look at a few key indicators to explore the state of insurance markets. We’ll also examine key events that have impacted markets recently.
THE VESTTOO FRAUD
Over the course of the summer, financial fraud was uncovered in the reinsurance industry, which has created immediate concerns for certain insurers and market concerns about how this event could have ever happened. The company responsible for this market misconduct is the Israeli fintech firm, Vesttoo. Their vision is (was) to connect aspiring “capital-light” entrepreneurs with the global capital markets to compete with the traditional reinsurance industry.
Unfortunately, in this case, it appears that the capital support portion was backed up by $4 billion of fraudulent letters of credit (LOC). In essence, the carriers who thought they were just “fronting” the policies, were, in actuality, taking on the risk.
The parties that were most impacted are the “fronting carriers” who were left exposed, as it is their paper now missing the capital support expected behind it, and the managing general agents (MGAs) responsible for underwriting and distribution. A fronting carrier is an insurance company that issues a policy and cedes all or the majority of the risk to a reinsurer. The state of Florida defines a fronting company as:
A “fronting company” is an authorized insurer which by reinsurance or otherwise generally transfers more than 50 percent to one unauthorized insurer which does not meet the requirements of s. 624.610(3)(a), (b), or (c), or more than 75 percent to two or more unauthorized insurers which do not meet the requirements of s. 624.610(3)(a), (b), or (c), of the entire risk of loss on all of the insurance written by it in this state, or on one or more lines of insurance, on all of the business produced through one or more agents or agencies, or on all of the business from a designated geographical territory, without obtaining the prior approval of the office.1
Unlike traditional “balance sheet” authorized reinsurers, which provide security to downstream insurance partners based on the liquidity and consistency of their balance sheets, Vesttoo focused on an alternative area of capital support known as insurance linked securities (ILS). ILSs provide an alternative capital to enter the insurance market and have risen in popularity in accordance with the fronting carriers that rely on them for support. These markets are considered “unauthorized insurers.” These ILS providers for Vesttoo put up letters of credit, $4 billion of which were not worth the paper they were written on.
The Vesttoo event is being billed as “Unicover 2.0.” Many will not have the grey hair to remember these events in the 1990s and the aftershocks provided to the general insurance marketplace, especially to my old friends at Reliance National. It was the first time I heard the term “cash-flow suffocation.”
Unicover sold a tremendous amount of reinsurance support to workers’ compensation carriers and MGAs, such as Reliance, who acted as a fronting carrier. It was a consortium of life insurance carriers (i.e. CIGNA, Lincoln) who had surplus to deploy and so they formed a reinsurance MGA called Unicover. On paper, they never took any risk on most transactions and should have never lost a dime. Fronting carriers cede all or most of the risk to other supporters (cedants) of a given transaction, and this was the traditional position of Reliance. They would be paid a fee to, in essence, take no risk (usually 5-6% of premium), but instead provide others the ability to trade with their paper. The support provided was also not traditional, but instead, occupational accident insurance (unauthorized like ILS), which was endorsed to act like workers’ compensation and was better understood by the life insurers that supported the positions. Or so they thought.
When the losses started rolling in and the reinsurers saw they had been duped on the positions they took, they litigated instead of paying claims. Whether they were right or not, this delay in funding for loss to Reliance quickly rendered the company insolvent. While on paper they were making great money and had an “A-” rating, the amount charged to front the policies was a fraction of the money needed to pay all the claims out in time. The 5-6% collected for the fronting fee was nowhere close to the 60-70% typically expected in losses.”
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