ILS sector awaits results of AM Best’s draft criteria

Bermuda’s burgeoning ILS sector will be watching with interest the outcome of AM Best’s recently launched draft rating criteria for insurance-linked funds.

This is the first time that the rating agency has targeted these funds directly with a rating criteria.

AM Best said that the rating is an opinion on an ILF’s average credit quality and vulnerability to losses due to credit defaults in a portfolio constituted primarily of insurance-linked assets and the inability of the fund to fulfill specific and direct contract obligations associated with insurance-linked assets, if such obligations exist.

The rating agency said that insurance-linked fund ratings are “fundamentally different from issue or issue ratings because funds generally cannot default on obligations, since they essentially have investors who own shares and can only participate in losses or gains associated with the funds.”

It added that a rating for an ILF doesn’t guarantee performance and does not make any statements about the net asset value shareholders should expect or the level of fees charged by a fund's manager.