The ILS market has reached a critical stage of its development, according to the ILS investor panel at Convergence 2020, titled: Growth Spurts & Growing Pains. Having experienced a significant shock event in 2020, in the form of COVID-19, ILS has certainly proved itself in a challenging market.
ILS is no longer a child that can be forgiven repeated bouts of immaturity, but neither is it yet a mature adult. It is, said Cate Kenworthy, head of investor relations and business development UK at Securis, enduring adolescence, and is experiencing the growing pains typical during this stage of development.
Chairing the discussion, Kenworthy invited panelists to play the role of concerned caregivers, offering advice to the industry as it seeks to navigate its way through these problem years, shepherding it into responsible adulthood.
Robert Howie, principal at Mercer, warned that ILS managers need to think about culture. “When comparing the culture of insurance companies with that of asset managers, for me it is a red flag when I meet an ILS manager who refers to counterparties and cedents as clients,” he said. “The investors are the clients.”
More broadly, ILS managers were urged to prioritise questions of transparency and clarity of communication, issues that panelists agreed ILS managers need to work on.
Howie said: “ILS is a simple product with a compelling message and many fantastic properties, but ILS managers make it sound complicated and use too much jargon.” He advised ILS managers to improve their communication skills to stop scaring away investors.
James Turner, investment manager at RPMI Railpen, agreed, warning in many cases ILS constitutes a small part of an investor’s portfolio. If it seemed excessively complex, many investors would not bother, he said.
“I would emphasise diversification more than absolute returns, and steer boards away from year on year relative value judgements versus other investments,” Turner said.
Howie emphasised the importance of avoiding nasty surprises. While returns are inevitably unpredictable, he noted, the way managers respond does not need to be. Managers should be clear about their policies around things like sidepockets and valuations, so that investors know what to expect.
The same is true for succession planning, Turner said, advising funds to think - and communicate - about it early, to avoid surprising investors. “My advice is for managers to be honest with investors and share their plans early,” he added. “Investors will understand if things change.”
However Craig Adkins, associate partner for alternative investments at Aon, warned that the talent pool for ILS managers is not as deep as it is for hedge funds, which could make succession planning more challenging.
Howie noted transparency had improved a little bit for investors during 2020, with the lack of business travel ensuring managers and investor relations executives were more available than usual.
However, Bernard Van Der Stichele, portfolio manager for ILS at the Healthcare of Ontario Pension Plan, warned this may not last forever, noting transparency often increases during a hard market, but often changes back quickly once the market turns.
Transparency is not the only issue of concern to investors, noted Adkins. “Long term investors have been exasperated by the continual need for more cash,” he said. ILS is competing against other opportunistic strategies, he noted, and if there is a high level of trapped capital, investors may prefer to allocate elsewhere.
Jason Rector, managing analyst at the State of Wisconsin Investment Board, noted that including other perils in ILS would help with the trapped capital issue. Making relatively small allocations to other perils like cyber ILS would increase portfolio stability, he said.
Rector stressed that property cat remains an attractive asset class, but insisted investors needed more alternatives in the ILS market. With property cat being the only peril offering significant capacity in ILS, investors are left as price takers, he warned. By opening up ILS markets for other perils, investors can be more opportunistic and look for relative value, Rector explained.
Panelists also discussed the options currently available to investors looking to invest opportunistically in ILS. Howie noted that if an investor is only allocating to one ILS fund it made sense to make it a multi strategy fund, which could invest in different strategies on an opportunistic basis.
Larger investors with the resources to make more allocations it might make sense to invest in specialists, he added.
Rector agreed, but warned in most cases ILS managers will have a better idea of where the opportunities were in the insurance market than investors.
Cate Kenworthy, Robert Howie, Mercer, James Turner, RPMI Railpen, Craig Adkins, Aon, Bernard Van Der Stichele, Healthcare of Ontario Pension Plan