Moody’s Ratings proposes new methodology for rating catastrophe bonds & ILS

Following its recent publication of a discussion paper on rating insurance-linked securities (ILS), with a focus on catastrophe bonds, Moody’s Ratings has moved forward and now proposes a new methodology for rating cat bonds and other ILS, seeking final feedback before its implementation.

Moody’s Ratings published its discussion paper on insurance-linked securities (ILS) and cat bonds back in March and sought feedback from market participants to help clarify its understanding of ILS market dynamics and associated credit risks.

Now, with a proposed cat bond and ILS rating methodology in the wild, Moody’s is looking for any final input and comments from the industry to assist in shaping its process.

Moody’s explained that the key elements of its proposed new catastrophe bond and ILS rating methodology are:

• Insurance risk analysis: We propose to analyze insurance risk by assessing the loss distribution of the risk covered by ILS and applying certain analytical adjustments. More specifically, we would use exceedance probability (EP) curves from widely recognized third-party modeling or actuarial firms as the main inputs for our quantitative modeling. We would then apply analytical adjustments to the EP curve to account for additional risks in ILS modeling and any risks related to the sponsor, which is typically an insurance or reinsurance company.
• Liability modeling: We would derive underlying loss scenarios with their corresponding probabilities, which are inferred from adjusted EP curves. We would allocate the loss of principal and interest for each scenario. We would then compare the derived expected loss (EL) to relevant EL benchmarks, based on the weighted average life of the ILS, to arrive at the model-indicated outcome.
• Other considerations: We would assess any additional risks for ILS investors, including counterparty risk, collateral risk, and structural and legal risk.

Moody’s Ratings further stated that “Unless changes are made following the comment period, this new credit rating methodology will be adopted as proposed.”

The rating agency has put out a request for comment, giving market participants until October 13th 2025 to respond. Comments can be submitted via the Moody’s website form here (you may need an account and to login to submit feedback).

Full details of the proposed rating methodology for insurance-linked securities (ILS) can be found here (again, you will need to login to see it).

As we’ve said before, although ratings are not widely used in the catastrophe bond or broader ILS sector today, they are still seen as beneficial by certain investors and sponsors.

So, keeping rating methodologies for cat bonds and other ILS up-to-date and available is important, as is ensuring they reflect how the market has developed over time.