Moody’s Rankings has published a discussion paper on insurance-linked securities (ILS), with a concentrate on catastrophe bonds, and is searching for feedback from market participants to assist make clear its understanding of ILS market dynamics and associated credit risks.
Moody’s Rankings said that, as catastrophe bonds turn out to be an increasingly essential component of insurance and reinsurance sector risk management arrangements, its goal with the paper is to elicit feedback from global market participants to deepen its understanding of the space.
This can help Moody’s Rankings to turn out to be more energetic within the space, the rating agency believes, while benefiting its overall approach to insurance research and rankings.
The truth is, Moody’s Rankings said this paper is a primary step in potentially producing a latest rating methodology for catastrophe bonds, although we understand that whether this actually goes ahead will rely upon the feedback received.
As rankings should not widely utilized in the catastrophe bond or broader ILS sector today, but are seen as helpful by certain investors and sponsors, keeping rating methodologies for cat bonds and other ILS up up to now is critical and it is vital to think about how the market has been developing.
So Moody’s Rankings’ paper, which features nine questions it’s searching for responses to, could be welcomed as a primary step by many available in the market, we suspect.
The questions posed are related to the structural features of ILS, in addition to market practices in modeling and valuation.
The paper explains, “Insurers have typically used catastrophe bonds, that are a form of ILS, to enrich their reinsurance programs. Along with diversifying counterparty risk exposure, catastrophe bonds provide access to a big, diversified pool of investor capital to cover exposure to distant risks. Lately, the catastrophe bond market has experienced substantial growth and evolution, driven by advances in data analytics and modeling technology, heightened investor demand and the increased need for risk-transfer mechanisms.”
“With the next questions, we seek to make clear our understanding of the market dynamics, transaction or security-specific structural features, data disclosure and modeling practices of this asset class.”
As we at all times say, it’s essential to have your opinions considered. So we’d encourage ILS market participants to make their voices heard by responding, in the event that they have applicable views, or strong feelings concerning the importance (or otherwise) of rankings for cat bonds or ILS, and robust rating methodologies being available for instruments utilized by the sector.
Moody’s Rankings questions are:
- How do catastrophe bond sponsors balance their need for risk-transfer capability with product availability?
- What conditions contribute to the evolution of the ILS asset class?
- How do investors monitor ILS?
- What enhancements to data disclosure and transparency of the underlying insured exposures could improve the chance assessment of catastrophe bonds?
- How do variability in transaction modeling and limited access to granular data affect investors’ risk assessment?
- What structural issues and counterparty risks could affect investors’ risk assessment?
- To what extent has delayed release of collateral and the uncertainty around ultimate losses affected investors’ assessment of catastrophe bonds?
- How do investors incorporate risks from changes to risk assessments by modeling firms?
- What are some issues limiting using ILS for insurable exposures beyond physical climate risks?
The complete discussion paper includes commentary to elucidate each of the questions and you’ll be able to download a replica if it here.
Moody’s Rankings is asking for responses from market participants by May fifth 2025, no later than 11:59 p.m. US Eastern time.
Responses might be submitted by email on to: [email protected]