Moody’s Ratings seeks ILS discussion paper feedback, considers new rating methodology

Moody’s Ratings has published a discussion paper on insurance-linked securities (ILS), with a focus on catastrophe bonds, and is seeking feedback from market participants to help clarify its understanding of ILS market dynamics and associated credit risks.

Moody’s Ratings said that, as catastrophe bonds become an increasingly important 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 will help Moody’s Ratings to become more active in the space, the rating agency believes, while benefiting its overall approach to insurance research and ratings.

In fact, Moody’s Ratings said this paper is a first step in potentially producing a new rating methodology for catastrophe bonds, although we understand that whether this actually goes ahead will depend on the feedback received.

As ratings are not widely used in the catastrophe bond or broader ILS sector today, but are seen as beneficial by certain investors and sponsors, keeping rating methodologies for cat bonds and other ILS up to date is critical and it is important to consider how the market has been developing.

So Moody’s Ratings’ paper, which features nine questions it is seeking responses to, would be welcomed as a first step by many in the market, we suspect.

The questions posed are related to the structural features of ILS, as well as market practices in modeling and valuation.

The paper explains, “Insurers have typically used catastrophe bonds, which are a type of ILS, to complement their reinsurance programs. In addition to diversifying counterparty risk exposure, catastrophe bonds provide access to a large, diversified pool of investor capital to cover exposure to remote risks. In recent years, 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 following questions, we seek to clarify our understanding of the market dynamics, transaction or security-specific structural features, data disclosure and modeling practices of this asset class.”

As we always say, it’s important to have your opinions considered. So we’d encourage ILS market participants to make their voices heard by responding, if they have applicable views, or strong feelings about the importance (or otherwise) of ratings for cat bonds or ILS, and robust rating methodologies being available for instruments used by the sector.

Moody’s Ratings questions are:

How do catastrophe bond sponsors balance their need for risk-transfer capacity 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 risk 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 the use of ILS for insurable exposures beyond physical climate risks?

The full discussion paper includes commentary to explain each of the questions and you can download a copy if it here.

Moody’s Ratings is asking for responses from market participants by May 5th 2025, no later than 11:59 p.m. US Eastern time.

Responses can be submitted by email directly to: [email protected]