Vesttoo scandal described as an “industry embarrassment” as leaders fear consequences

Leading executives gathered at The Insurer’s Pre-Monte Carlo Forum have predicted the Vesttoo scandal will be a key discussion point at next week’s Rendez-Vous, while returns on capital, pricing, avoiding the chaos of the last 1.1 and AI will also be on the agenda.

  • Execs remain concerned about the fallout from Vesttoo, including difficulties in structuring deals and potential LOC oversight from regulators and rating agencies
  • Lessons from the disorderly market of 1.1 have to be learned, says Howden Tiger’s Elliot Richardson, with brokers and reinsurers more ready to have difficult conversations early on
  • AI continues to work its way in to the industry, although scepticism remains over its practical application to specialty reinsurance

“I don't think we'll know just how this situation is for a number of years,” was the view of MS Reinsurance CUO Charles Goldie.

“It takes time to know whether there are losses and where they will be as we’re looking at three, four, five year accounts,” he added.

Earlier in a keynote speech, the former PartnerRe P&C CEO – who joined MS Reinsurance in 2020 – called the saga “an embarrassment to the industry”.

“We are a risk-taking industry that looks to avoid big losses. At every stage, you are supposed to have taken precautions, even if someone else is responsible. This is where the industry has fallen down,” he added.

“I can't tell you who's responsible but I can tell you it’s ugly and I can say it's a fraud because I know a little bit about public companies that are taking massive write-downs on losses. So the losses are real. There was a fraud. Who did it, I don't know. But we should have caught it.”

Insurance Advisory Partners managing partner and co-founder Tony Ursano questioned whether this is “an isolated event or more pervasive”, adding: “I think we have a real issue.”

He predicted that there’s likely to be more oversight from regulators and rating agencies as a result.

“Their question will be – is there anything else not working out there in the ILS world?”

Despite the concerns over fraudulent letters of credit (LOCs), Ursano believes they’ll continue to be used, albeit with more scrutiny over the LOC providers.

“I think people are going to be careful about where LOCs come from. How strong is the counterparty, and do they have a relationship where they know everything about the investor?”

Luca Albertini, CEO at Leadenhall Capital Partners, expressed his shock that senior management at Vesttoo were seemingly unaware of the scale of the false LOCs, although he acknowledged that “nobody can be immune from a well-organised fraud”.

On likely discussion topics in Monte Carlo, Albertini noted that the transitory nature of capital is a crucial focus and the market needs to deliver an appropriate return over the long term “because it can come out as fast as it came in”.

Elliot Richardson, vice chair of Howden Tiger, said brokers need to be better at managing expectations correctly, noting “that was a failure in the system last year”.

“You need to have the hard conversations with clients, while equally pushing to be an advocate to the market. I think that’s one thing that has calmed down, if there was too much emotion in it last year, we had a much more orderly 1.6 renewal,” he added.

Addressing a question to the panel on AI and algorithm-based underwriting, Goldie noted the concerns he had with AI’s ability to deal with tail risks, arguing that for personal lines AI had huge opportunities, but for nat-cat-exposed risks, past modelling can not always be relied on for future expectations.

“We're constantly hit by things that haven't happened before. And models worked great in the mean of the distribution. But as you get out into the tail, you don't have the parameterisation that you normally have.”

He added a cautious note about the specialty market relying on algorithmic underwriting too much: “Investors get excited about data and what it can do for reinsurance and I have to remind them that we're covering the things that our clients don't understand. If they had the data, they wouldn't buy.”

However, the panellists all agreed that there’s clearly opportunities to add AI to working practices, with Bryan Cave Leighton Paisner’s Jonathan Sacher noting that “with claims, AI can be very constructive and positive”.

Richardson noted that “whoever starts to crack that code first will get a huge advantage”, but added: “We as an industry have the usual ways of looking at things and hoping they go away, but it’s not going to.”

Look out for further coverage and analysis from today’s event in The Insurer’s Monte Carlo event coverage next week.