Fitch Ratings has updated its ratings criteria for catastrophe bonds, that is to say structured financings where payments to investors are exposed to the risk of catastrophic events such as earthquakes, hurricanes and fires.

The ratings criteria report, dated March 11, 2008, summarises Fitch’s approach to rating catastrophe bonds. It details the rating process, Fitch’s attitude to various catastrophe models, circumstances in which Fitch might make adjustments to modelled loss statistics and its approach to reviewing ratings.

The most significant change is that all tranches of catastrophe bonds will now be rated against a probability of loss criterion; previously only investment grade tranches have been rated against a probability of loss criterion, with non-investment grade tranches being rated against an expected loss benchmark.

Fitch has also reduced its reliance on “blanket” stress factors applied against various modelling assumptions. Fitch say that this is based on increased comfort with third party modelling analysis and Fitch’s new “historical default grid”, which is generally more conservative than the prior default grid at the high end of the investment grade range and the high end of the non-investment grade range.

The report can be found here.