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Original Risk: A Society for Change Agents

Fitch updates its methodology for rating insurance-linked securities


Ratings agency Fitch Ratings has published a periodic review and update of its methodology for rating insurance-linked securities (ILS) including catastrophe bonds. This new version of the criteria replaces one dated August 2012.

The report provides Fitch’s global methodology for rating insurance-linked securities either as the obligations or as counterparty credit risk of special-purpose (re)insurers (collectively ILS).

Fitch defines ILS as follows:

ILS refers to various types of transactions whose primary aim is to isolate and transfer specific insurance risks and products to investors or other third parties. Usually these risks are “low frequency, high severity” events or incorporate remote triggers.

Generally speaking, ILS serves as a vehicle for risk transfer, risk financing or securitization of future profits. Examples of transferred risk perils include natural catastrophes, pandemics (extreme mortality) and medical loss ratios. Risk financing may cover excess reserve requirements on life insurance contracts (i.e. Regulation XXX reserves). Securitization transactions may include fees from unit-linked annuities or net cash flows from disability income business.

The new version of the ILS rating methodology eliminates redundant language, clarifies the interpretation of the calibration matrix and also modernises some of the text to reflect market trends.

As a result the changes are not sufficient to have affected the rating of any outstanding catastrophe bonds or ILS transactions that Fitch provides a rating for.

You can access a copy of the latest ILS rating methodology here.

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