Life/Health CAT Bonds Likely Most Affected by COVID-19: A.M. Best

A blackstethoscope wrapped around a small stack of one-hundred-dollar bills.

May 21, 2020

A blackstethoscope wrapped around a small stack of one-hundred-dollar bills.

Life/health-related catastrophe (cat) bonds face the greatest risk of losses from the COVID-19 pandemic, compared with other insurance-linked securities (ILS), according to A.M. Best.

Their exposure to pandemics, extreme mortality, and spikes in medical benefits claims heightens the risk for life/health cat bonds, Best reported in a recent commentary titled "COVID-19 Impact on the Insurance-Linked Securities Market."

In the commentary, Best suggests that the COVID-19 pandemic's overall impact on the ILS market—including most catastrophe bonds—should be limited given that the underlying risk coverage is most often associated with property losses resulting from natural catastrophes like hurricanes, earthquakes, tornadoes, and wildfires.

The cat bonds that will feel the greatest impact are those providing coverage against severe increases in medical benefit claim levels or increases in mortality rates due to a pandemic event, Best said. The rating agency cited a catastrophe bond issued by the World Bank's Pandemic Financing Facility, noting that all the deal's triggers have been met with the payout loss amount estimated at $132.5 million.

Best noted that secondary market catastrophe bond trading picked up as the COVID-19 pandemic advanced, as investors sold bonds to increase liquidity. That trading was similar to a pattern seen during the 2008–2009 financial crisis, the rating agency said.

"The cat bond market reached record issuance levels in the first quarter of 2020," the May 7, 2020, Best's Commentary said. "The immediate impact of COVID-19 is the delay in issuing future cat bonds because of the disruption in the capital markets. The future for the cat bond market, however, remains promising given that the amount of cat bonds expected to mature in the second quarter of 2020 is approximately $4.1 billion."

The commentary also suggested that COVID-19 is likely to increase the demand for pandemic coverage, though it remains to be seen how much of that risk will be transferred to the capital markets by catastrophe bond sponsors.

May 21, 2020