Moody’s Ratings has published a new discussion paper about pooled structures of insurance-linked securities (ILS) and is seeking market feedback to clarify its understanding of market interest and the risk analysis needs for such financial instruments that could expand the investment use-case for ILS.
“ILS-backed securities are instruments backed by a pool of ILS, in which losses on the pool are allocated across senior and subordinated debt securities based on predefined priority of payments.”
It’s not a particularly common topic in the ILS world so far, but securities that back pools of financial instruments are utilised across other asset classes and as the catastrophe bond and ILS market grows and expands, this concept is one which may find some traction.
Moody’s Ratings’ discussion paper does not propose any changes to any rating methodologies, rather seeks feedback, information and market input to help in clarifying its thoughts about the appetite for pooled ILS structures and instruments, as well as how they might be analysed and assessed.
Specifically, Moody’s Ratings is seeking answers to a number of questions about the key features, risks and analytical considerations associated with pooled structures of ILS.
The rating agency further explains, “With the following questions, we seek to learn more about market participants’ perspectives on the drivers of demand. We also seek information about the level of detail needed in the data to evaluate risks in pooled structures of ILS. Also, we invite discussion on structural and modeling considerations, alternative types of pooled structures, and relevant legal and regulatory issues that affect this asset class.”
One key question is regarding investors’ preferences for accessing returns from ILS instrument risk, in terms of how the investor base might feel about accessing the asset class via specific tranches of ILS-backed securities, compared to the more typical direct investment in individual ILS instruments, or gaining exposure to the asset class through specialist ILS funds.
“ILS-backed securities would provide investors with access to a diversified portfolio of ILS while also introducing a structure with senior and subordinate tranches that reflect different investors’ risk and return objectives,” Moody’s says.
The rating agency believes there is “growing interest in the levels of risk that different tranches of debt present,” highlighting that through creation of ILS-backed securities could create more senior ranked debt securities with a more remote probability of incurring losses from the pool, than a single underlying ILS instrument might have.
“This structural feature may broaden the investor base for ILS,” Moody’s believes.
It’s an interesting concept and one that, as we say, is likely to become an increasingly frequent topic of conversation as the ILS market continues to expand and the investor base broadens with it.
There have been efforts to create insurance-linked securities opportunities that have more senior ranking and even investment grade rated tranches of securities in the past.
One example would be Nephila Capital’s innovative Gamut Re transaction back in 2007, which leveraged collateralised debt obligation (CDO) technology to bring a diversified pool of natural catastrophe risks to investors.
Other examples of innovative transactions that achieved investment grade type ratings include the mid-2008 issue Vega Capital Ltd. (Series 2008-1), as well as a novel equity and bond type catastrophe securitisation by Hannover Re named Globe Re Ltd. from the same year.
Back in 2015 Standard & Poor’s gave an investment grade rating to the Kizuna Re II 2015-1 cat bond, although that was due to the remote nature of the Japanese earthquake risk being ceded which earned it a BBB-.
In more recent years, ILS fund manager Leadenhall Capital Partners achieved an investment grade rating for two private catastrophe bonds in 2016 and then most recently the $100 million Stratosphere Re Ltd. (Series 2020-1) cat bond covering tail risks on Nephila Capital’s fronted business achieved a ‘BBB’ rating in 2020.
An investment grade rating can help to unlock new sources of investor capital, with some of the world’s largest investors only allocating to securities that meet that assessment level.
Of the examples above, Gamut Re is likely the most akin to the pooled structures of insurance-linked securities concept that Moody’s Ratings is seeking market feedback on, while the others are perhaps more ILS-backed securities sitting over pooled reinsurance contract structures, with their remoteness, sponsor credit rating and structuring enabling the ratings.
The ILS market is now mature and large enough that this kind of innovative development may gain greater interest and possibly traction, so we’d encourage those interested to provide Moody’s Ratings with feedback.
The questions Moody’s Ratings is seeking feedback on are:
- What are the key considerations for investors in deciding whether to choose ILS-backed securities rather than individual ILS or ILS funds?
- What level of detail do investors need in the data to evaluate risks in ILS-backed securities?
- What features of ILS-backed securities influence investors’ risk appetite?
- How do investors view modeling approaches for aggregating pools of ILS and for capturing the correlations between underlying ILS in the pool?
- How do investors view static versus dynamic pools of risk in ILS-backed securities?
- How do market participants manage extension and reset risk in pooled structures of ILS?
- What other pooled structures of ILS might market participants consider?
- How do market participants view legal and regulatory risks associated with ILS-backed securities?
Moody’s subscribers can access a copy of the discussion paper here.
Feedback is requested by 11.59pm US Eastern time on May 15th 2026, by emailing: [email protected]
