Analysts at AM Best believe that life and health (L&H) related catastrophe bonds face the greatest threat of losses from the COVID-19 pandemic, compared with other insurance-linked securities (ILS).
The rating agency expects the overall impact of the pandemic on the ILS market to be limited, given that the underlying risk coverage stems mostly from property losses arising from natural catastrophe perils such as hurricanes, earthquakes, tornadoes and wildfires.
Instead, 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.
Notably, all trigger conditions have now been met for the $320 million IBRD Capital-At-Risk notes 111-112 cat bond from the World Bank’s Pandemic Financing Facility, with payouts currently estimated at $132.5 million.
The more immediate impact of COVID-19 is the delay in issuing future cat bonds because of the disruption in the capital markets.
AM Best also considers the impact on traditional and collateralised reinsurance markets to depend on the success of legal actions focused on COVID-19 business interruption claims.
In addition, COVID-19 exposure could result in further trapped capital that likely will be held for multiple years given that the ultimate quantification of covered losses will prove much more challenging.
And mortgage insurance-linked securities (MILS) transactions may face challenges as well if private mortgage insurers delay plans to sponsor more transactions, until there is more certainty in the capital markets and the effect of COVID-19 on their operational results.
Overall, AM Best expects the COVID-19 outbreak to increase future demand for pandemic coverage, as the event will bring more awareness to the economic losses associated with pandemic exposures.
