Fitch Ratings Updates Insurance-Linked Securities (ILS) Criteria

Fitch Ratings has published a periodic review and update of its criteria report for rating insurance-linked securities. The updated report replaces the previous version published in September 2022 (see Investors in Insurance-Linked Securities).

Fitch added language outlining the process that will be used to review external, third-party models that generate risk analysis output.

This output is typically used in assessing the credit rating of insurance-linked securities transactions. The existing language in the criteria applied to established software vendors that had established an adequate operating history.

For newer fintech or insurtech firms that may not have an established operating history, the new language expands the criteria to include Fitch’s approach to these type of third-party models, if they provide sufficient and robust information and documentation including a Model Risk Management document, a Model Definition document and an independent Risk Analysis Report.

Other editorial changes were made to provide further clarity but did not change the intent of the criteria. These changes did not affect, or lead to changes of, any existing Fitch credit ratings.

The Insurance-Linked Securities Rating Criteria is a sector-specific rating criteria report and draws upon other criteria from the Structured Finance and Insurance sectors in assigning a rating.

Insurance-linked securities are typically used to transfer insurance risks to the capital markets, to fund excess reserve requirements, or to securitize value-in-force cash flows.

Global ILS market remains bogged with prior catastrophe losses as the overall performance of funds deteriorates, despite another year of record cat bond issuance.

Issuance in the 144a cat bond market reached a record of approximately $12.5bn exceeding the previous record set in 2020 by $1.5bn.

Despite the generally higher returns cat bonds offer, US insurers hold only about $850m of the roughly $33bn outstanding cat bonds.

According to Global Insurance-Linked Securities Market Outlook, only about 40 insurers have exposures to cat bonds and five companies account for nearly 70% of investments.

Swiss Re’s US entities hold more than 20% of the industry’s investments, across a variety of risks and cedents, with the majority of the other investors being life insurers.

Nataly Kramer   by Nataly Kramer