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AM Best urges parallel underwriting discipline and risk transparency in casualty ILS
AM Best says the casualty insurance-linked securities market has low penetration in alternative capital and that casualty liabilities can take years to emerge, complicating loss development and investor returns.
As the casualty insurance-linked securities, or ILS, market expands, AM Best is urging participants to develop underwriting discipline and risk transparency together to keep pace with investor demand, according to a new report cited by Artemis.
AM Best said some reinsurers have raised concerns about the speed and framework of specific casualty ILS initiatives, while also noting that casualty ILS remains a relatively small part of the broader alternative capital market.
The rating agency pointed out that while ILS succeeded in transforming parts of the property catastrophe market, casualty risks have been harder to replicate for investors, including because casualty exposures can take years for liabilities to emerge and are shaped by changes in legal and social environments and capital market volatility.
AM Best also flagged that proposed structures could carry elevated investment risk and that underwriting risks in casualty business may not be fully evident for extended periods, which it said traditional reinsurers view as inconsistent with the ILS premise.