L&H cat bonds face greatest threat from COVID-19, says AM Best

Analysts at AM Best expect that the overall impact of the COVID-19 pandemic on the insurance-linked securities (ILS) market, including most catastrophe bonds, will be "limited", but there may be delays in issuance due to the disruption in the capital markets.

According to the agency, the underlying risk coverage stems mostly from property losses arising from natural catastrophe perils such as hurricanes, earthquakes, tornadoes and wildfires.

However, it warned that life and health-related catastrophe bonds face the greatest threat of losses from COVID-19, compared with other ILS, given their exposure to pandemics, extreme mortality and spikes in medical benefit claims.

The remaining sectors of the ILS market, including collateralised reinsurance sidecar and industry loss warranty (ILW), will see varying impacts from the ongoing crisis. AM Best noted some of them will be confronted with losses from business interruption risk for the policies that provide a broad range of property/casualty insurance coverage.

AM Best stated that some popular non-convergence ILS products, such as life settlements and life contingent structured settlements, may also be impacted by the pandemic since their performance is related to mortality rates.

Cat bonds based on medical benefits claims levels and mortality rates have been the most severely impacted to date. 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 most affected cat bond programs are those providing coverage against severe increases in medical benefit claim levels or increases in mortality rates due to a pandemic event," said AM Best. "Of note is the $320 million IBRD Capital-At-Risk notes 111-112 cat bond from the World Bank's Pandemic Financing Facility. Currently, all trigger conditions have been met and industry estimates put the payout loss amount at approximately $132.5 million."

The cat bond market reached record issuance levels in the first quarter of 2020. However, AM Best warned that COVID-19 will likely result in delays to further issuance, due to the disruption in the capital markets.