Move follows August draft of criteria for Insurance-Linked Securities
Fitch Ratings has published its methodology for rating insurance linked securities (ILS). This methodology represents the final version of a methodology first published as an exposure draft.
ILS are structured finance transactions that involve insurance risk, such as risk from natural catastrophes and reinsurance recoverable risk.
In August last year, Fitch released and sought market reaction to its Exposure Draft. The respondents included some of the world's largest investment banks and reinsurers.
In a statement, the company commented: "Several respondents commented on Fitch's use of a probability of loss benchmark in rating ILS, noting that the expected loss statistic is used by the capital market to price ILS and by reinsurers to price coverage in the traditional reinsurance market.
"They also pointed out that the expected loss statistic is more informational because expected loss reflects both probability and severity of loss. However, ILS are structured finance products and Fitch's structured finance ratings primarily reflect the relative probability of default of the rated liability, and not its loss severity given a default.
"Another difference between the final report and the exposure draft relates to the maximum rating that might be assigned to catastrophe bonds (or other ILS) that are exposed to loss from a single large event. While the exposure draft contemplated no limit to the rating that might be assigned to such tranches, provided the probability of loss was low enough, Fitch does not currently expect that tranches exposed to loss from a single event will be ratable above 'AA'."
Fitch plans to publish series of more detailed criteria pieces tailored to specific transaction categories.