The impact of the COVID-19 pandemic on the insurance linked securities (ILS) industry is likely to be limited, according to AM Best, given that the underlying risk coverage predominantly relates to property losses related to natural disasters such as hurricanes, flooding and earthquakes.
However, it warned that life and health-related cat bonds could suffer escalating losses, depending on the size of payouts for pandemic, extreme mortality and medical benefits exposures.
Other forms of ILS, such as collateralised reinsurance, sidecar and industry loss warranty, will experience varying impacts from the pandemic, AM Best said, with some transactions likely to experience losses related to business interruption risk.
AM Best noted that some popular non-convergence ILS products, such as life settlements and life contingent structured settlements, may also suffer, due to increased mortality rates. Cat bonds based on medical benefits claims levels and mortality rates have been the most severely impacted to date, AM Best said. These include the World Bank’s Pandemic Financing Facility, Aetna Life Insurance Vitality Re cat bonds and the Swiss Re Vita Capital VI bond.
The impact on such structures will be determined by the duration of the pandemic and the populations that are impacted the most, AM Best said.
The rating agency noted that secondary trading of cat bonds had increased as the pandemic progressed, replicating a pattern seen during the 2008 financial crisis, as investors sold ILS to free up liquidity.
The secondary market is currently trading at a small discount, although prices have recovered since initial falls in March. However, AM Best warned ILS fund managers may see increased redemptions as investors unwind their ILS positions.
AM Best noted that Q1 2020 saw record levels of issuance for cat bonds. However, it warned COVID-19 will likely result in delays to further issuance, due to disruption in capital markets, it said. The longer term future of cat bonds looks positive, it added.
AM Best said Q2 will see approximately $4.1 billion worth of cat bonds mature.
AM Best, Insurance linked securities, ILS