Life & health ILS face the greatest threat from COVID-19: AM Best

Life and health-related catastrophe bonds face the greatest threat of losses from the COVID-19 pandemic, compared with other insurance-linked securities (ILS), according to research conducted by AM Best.

In a report titled COVID-19 Impact on the Insurance-Linked Securities Market, the rating agency warned life and health related ILS have a particularly high exposure to pandemics, extreme mortality and spikes in medical benefit claims.

It cited the $320 million IBRD cat bond from the World Bank’s Pandemic Financing Facility, which is estimated to be liable for payouts worth approximately $132.5 million.

The overall impact of the COVID-19 pandemic on the ILS market, including most catastrophe bonds, should be limited, AM Best said, given that most structures are based on catastrophe perils such as hurricanes and earthquakes.

However, it noted mortgage ILS transactions could face challenges related to COVID-19, due to the dislocation in the bond market. “Private mortgage insurers may delay plans to sponsor more mortgage ILS transactions, until there is more certainty in the capital markets and the effect of COVID-19 on their operational results,” it said.

It warned COVID-19 exposure is likely to result in additional trapped capital that could be held for multiple years, given that the ultimate quantification of covered losses will prove challenging.

AM Best predicted an increase in demand for pandemic coverage going forward, but added: “It remains to be seen to what extent cat bond sponsors will bring this exposure to the capital markets.”