Moody’s Ratings has now finalised and published its awaited new methodology for rating insurance-linked securities (ILS) such as catastrophe bonds.Moody’s Ratings had issued a discussion paper on insurance-linked securities (ILS) and cat bonds and put out a call for feedback from market participants, to help clarify its understanding of ILS market dynamics and associated credit risks as well as the perceived need for ratings of these instruments., with a proposal for a new cat bond and ILS rating methodology having been circulated, Moody’s sought final input and comments from the industry to assist in shaping its process.Now, Moody’s Ratings has published the finalised rating methodology for insurance-linked securities and catastrophe bonds, meaning it is now open to accept enquiries about rating new ILS issuances.

The new methodology implements the rating approach that had been proposed in that August update, having taken into consideration two confidential comments that had been received.Although ratings are not widely used in the catastrophe bond or broader ILS market today, they are still viewed as a beneficial feature for transactions by certain investors and sponsors.So now, with a brand new rating methodology finalised and published for cat bonds and other ILS by Moody’s Ratings, those constituents that view ratings as an attractive feature have a new option to consider.

Explaining what the methodology offers and what is involved in its rating process for cat bonds and ILS, Moody’s Ratings said, “In this methodology, we analyze insurance risk by assessing the loss distribution of the risk covered by ILS and applying certain analytical adjustments.More specifically, we use exceedance probability (EP) curves from widely recognized third-party modeling or actuarial firms as the main inputs for our quantitative modeling.We then apply analytical adjustments to the EP curve to account for additional risks in ILS modeling and any risks related to the sponsor, which is typically an insurance or reinsurance company.

“For liability modeling, we derive underlying loss scenarios with their corresponding probabilities, which are inferred from adjusted EP curves.We allocate the loss of principal and interest for each scenario.We then compare the derived expected loss (EL) to relevant EL benchmarks, based on the weighted average life of the ILS, to arrive at the model-indicated outcome.

“We also assess any additional risks for ILS investors, including counterparty risk, collateral risk, and structural and legal risk.” Full details of the published rating methodology for insurance-linked securities (ILS) , while an additional technical white paper titled “Insurance-linked securities modeling framework” is also available ( you will need a login to access these documents)..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.Our can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.