December 11, 2023

Vesttoo, an insurtech-focused insurance-linked securities (ILS), has come under scrutiny after allegations of fraudulent collateral emerged yesterday from an Israeli tech publication.

Vesttoo logoPublisher Calcalist made a statement for the first time on CTech, claiming that “billions of dollars in collateral” were involved, a very high number for a company in the development stage of Vesttoo, and pointing to the billions offered by the company is “fraud”.

The publication said an initial investigation, which was underway, uncovered this “fraudulent collateral” and “found that the collateral the company claimed was virtually non-existent.”

Artemis contacted Vesttoo for comment and received the following response acknowledging that an investigation is ongoing.

“The Vesttoo team found inconsistencies between the investors and the spin-off company in the transactions that Vesttoo modeled its risk.

“We take the integrity of our business very seriously and are undertaking a comprehensive third-party audit to ensure our due diligence process continues to be robust.”

The scale of this purported collateral issue is unclear, as the issuer claims the amount affected will be in the billions, suggesting something is affecting many Vesttoo transactions.

In insurance-linked securities (ILS), transactions are mostly fully collateralized and backed one-for-one by collateral, or are mostly collateralized, minus any benefit of prepaid premiums or leverage, and any inconsistencies or errors may be A key issue is for the integrity of the transaction.

This can lead to a collateral shortfall, meaning there is not enough money to cover any claims, or investors are unable to get their money back when the deal matures.

Of course, it also affects investment value, meaning that third-party investors don’t really own the value they’ve marked in their books.

As far as capital credit is concerned, the knock-on effects of any collateral-related errors or problems are particularly important to the cedent, as they may need to demonstrate that collateral is available as part of their protection or solvency, and may face The situation where collateral is short is found to be lacking.

We previously learned that Vesttoo often uses Letters of Credit (LOCs) in its ILS transactions, with the bank providing the letter of credit and the investor interacting with the bank. If that’s the case, it seems likely that any banking processes involved in any problematic transactions will also be subject to some scrutiny.

Israeli newspaper Globes provided more information and another statement suggesting that Vesttoo’s board had launched an investigation into alleged fraud, expressing suspicion that “the assurance documents submitted to complete the transaction were falsified”.

Vesttoo confirmed in a statement that the fallout from the investigation had led to the departure of a number of senior executives at the company.

“Some members of the leadership team have decided to leave without awaiting the outcome of the audit and we respect their decision,” the company said.

We’re not going to speculate on what’s actually going on here. At this stage, all claims and information are limited.

It is important to note, however, that risk transfer for reinsurance collateral and issuance of Insurance-Linked Securities (ILS) is one of the fundamental elements of the ILS market and an area where compliance is absolutely critical.

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