Transparency & proactive relationships are key, say leading ILS investors

Pension fund investors that allocate to the insurance-linked securities (ILS) space are looking for a certain level of transparency, humility, and a dynamic relationship, according to Craig Dandurand, Head of Debt at the Future Fund of Australia.

On the penultimate day of our virtually held ILS Asia 2020 conference back in July, attendees heard from three experienced pension fund investors who participate in the ILS sector.

The panel session, which included Eveline Takken-Somers, Senior Director, Lead Portfolio Manager – Insurance Portfolio, PGGM; Bernard van der Stichele, Portfolio Manager (ILS), Fixed Income & Derivatives Healthcare of Ontario Pension Plan (HOOPP); and Craig Dandurand, Head of Debt, Future Fund of Australia, provided an insightful and comprehensive exploration of ILS from the view of institutional investors.

Speakers discussed the challenges of the past few years on the back of some fairly smooth sailing, and the audience was reminded of the relatively short history of the ILS market and the fact that for many, investors and funds alike, the recent sequence of events was a new experience.

During the session, van der Stichele highlighted the lack of transparency that became evident after the events of 2017 and 2018. He noted the difference in what’s typically being shown to investors, in terms of ILS products and opportunities, against how the risk is actually sourced, packaged and managed before it gets to investors.

The topic of transparency came up again at the end of the session, when panellists offered their views on what they would like to see the ILS fund managers and the people who court them do going forwards, to encourage an allocation.

“I think what all three of us are looking for is a degree of transparency, we’re looking for humility, we’re looking for a proactive relationship,” said Dandurand.

“Certainly, we know that this is an industry where almost all of the surprises are bad ones, so the best way to maintain a high quality relationship is to mitigate the extent to which those surprises come to us. And, do it in a way that we understand, so we know the risks we are taking so when the losses come, they’re the ones that we are willing to accept and acknowledge as part of the investment process.”

Earlier in the session, Takken-Somers, who agreed with Dandurand’s comments on transparency, discussed the challenges of loss creep for her firm, underlining the difficulties in going back to investors time and time again when loss reserves are adjusted.

The climate change issue was also raised by panellists, and Takken-Somers urged the industry to dedicate more time to both understanding and explaining this topic.

While van der Stichele said, “Eveline brought it up but I think that’s an increasingly important topic. And, being at a fund that has only just started working in the ILS market, I know that there have been a lot of questions from the Board and other stakeholders in terms of do we understand the impact of climate change.

“I think that’s increasingly important and I think it warrants more than just a single slide at the end of a pitchbook. I think all parties in this market are going to have to perhaps beef up their own understanding of climate change, climate science, and climate risks, and really pay attention to that.

“And, also put pressure on the catastrophe risk modelling firms and vendors to make the necessary adjustments to their models if they are warranted. But, again, it’s a question of education.”

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