2017 showed importance of ILS manager selection: PSERS CIO

According to James Grossman, the Chief Investment Officer (CIO) of the Commonwealth of Pennsylvania, Public School Employees’ Retirement System (PSERS), the experience of 2017 showed just how important it is to partner with a well-respected insurance-linked securities (ILS) fund manager.

In an interview with Clear Path Analysis from its latest ILS sector report, Grossman discussed the impacts of 2017 catastrophe events on the ILS space and the response of the market, with a view to lessons learnt from one of the costliest loss years on record for global insurance and reinsurance.

Grossman explained that looking back on 2017, one of the messages his firm took following conversations with its ILS fund managers, was that a large volume of capacity was sat on the sidelines waiting to enter, essentially in hope of improved yields driven by an expected post-event price surge.

Following these conversations, Grossman explained that PSERS wasn’t convinced in the ability to invest all of this capital into the space, something that highlighted the importance of working with a respected manager.

“Stepping back from it, we learned that it is important to partner with well-respected managers who are able to deploy capital, in part because of the strong relationships they have within the industry. Since our managers are well-respected within the industry, they were able to get our money deployed at attractive pricing into the market.

“Partnering with well-respected managers in the ILS industry is very important,” said Grossman.

After the impacts of 2017 catastrophe events, ILS capital reloaded and actually expanded in time for the January renewals, and just like the traditional market, was eager to take advantage of post-event market conditions and secure more attractive rates.

But as highlighted by Grossman, with so much capital from both existing and new investors looking to enter the sector under more desirable terms, the importance of working with a well-respected manager with strong counterparty relationships was evident.

“We do believe that we have partnered with well-respected ILS managers and they have built long term relationships with their counterparties. We believe that these relationships, along with many insurance and reinsurance companies rethinking how much cover they purchase, will likely play out to our advantage,” said Grossman.

While rates have improved following 2017 events, the abundance of available reinsurance capital has resulted in what many have described as muted price increases, with loss-affected lines experiencing the largest increases at renewals, although industry commentary has suggested that even these have been disappointing, so far.

Discussing pricing in the sector after the series of hurricanes, earthquakes and wildfires, Grossman said: “We believe that the opportunity set will persist for some time, though it may take a while for the total impact of the 2017 loss events to be felt as the process of adjusting and paying out claims will happen over time.

“A major factor in determining how long the improved pricing environment will last will be the market’s ability to raise capital. If capital pours into this market, we would anticipate rate increases could be muted. In this case, we would probably reduce our allocation over time or at least take profits out of the allocation.”

A copy of the seventh annual ILS for Institutional Investors report from Clear Path Analysis can be downloaded from its website.