Fitch updates its insurance-linked securities (ILS) rating criteria

Fitch Ratings has completed a periodic review and published an updated version of its criteria report for rating insurance-linked securities (ILS) including catastrophe bonds. The criteria report was last updated a year ago and Fitch have brought it up to date in terms of data, reflecting any changes to legal structures and/or insurance risks within the ILS sector.

Fitch’s criteria report provides the global methodology for rating insurance-linked securities, as well as the obligations and/or counterparty risk as Fitch see’s them of special-purpose (re)insurers designed to isolate and transfer specific insurance risks or products to investors or other third parties. Usually the risks transferred within an ILS deal are ‘low frequency, high severity’ events, or incorporate remote triggers.

Fitch characterise ILS as instruments which either serve as a risk transfer or a risk financing vehicle for insurance or reinsurance companies, of course they can actually be issued by corporates as well. From a risk transfer point of view, Fitch says that ILS can include perils such as natural catastrophes (so cat bonds), pandemics or extreme mortality, and medical loss ratios. Risk financing structures within the ILS category include embedded value of unit-linked annuities, disability income policies or life insurance contracts.

Fitch says it has not made substantial or material changes to the rating criteria report which would either alter or affect any existing ILS rating. Despite this, we recommend reading the report as it provides a really good backgrounder to ILS and cat bonds and the factors that matter to a rating agency such as Fitch.

You can access the rating criteria document on the Fitch Ratings website here.