The Ontario Teachers’ Pension Plan Board (OTPP), one of the longest standing pension fund investors in insurance-linked securities (ILS), is to again downsize its allocations to the space and has already pulled back from two ILS funds, Artemis understands.
One of the largest pension funds in the world with approximately C$190 billion of assets under management, OTPP has invested in the ILS market for more than a decade, over which time it has changed its allocations depending on market conditions.
OTPP has a track record of upsizing and downsizing its allocations to the ILS asset class and reinsurance linked investments, having had more than $2 billion in the sector a few years back, but more recently dialed back its ILS and reinsurance linked investment allocation somewhat, in response to market conditions.
We understand that after the market losses of the last two years, OTPP is set to significantly downsize its natural catastrophe-exposed ILS allocation and that the pension fund has already pulled back from two ILS funds as part of this process.
We’re told that some of the reason for this is performance related, but that there are broader concerns at OTPP related to how catastrophe risks are priced, notably in light of climate change risks, as well as how catastrophe losses are reported and reserved for.
Sources said that OTPP was also concerned by the loss creep from hurricane Irma and the way that hit certain ILS funds, feeling that they could have reserved better for this in the first place.
Broader questions over the ability of the industry to raise prices commensurate with the risks and the role of risk models are also understood to have influenced the decision for this significant pull back at this time.
The ILS allocation will remain a relatively meaningful part of the pensions broader alternatives exposure and we understand that OTPP continues to look for other opportunities in ILS or reinsurance, where it can generate returns it feels are commensurate with the risks it is taking on.