Key Takeaways
- • Joe Tolen, Investment Director in the Credit Investment Group at Cambridge Associates, identifies the ability to select ILS managers with appropriate capital reserving techniques as a crucial element of manager selection, particularly in the immediate aftermath of large catastrophic events.
- • In a recent Cambridge Associates report, Tolen wrote that catastrophic event frequency and severity between 2017 and 2022 have inevitably led to side pocketing and trapped collateral across the industry.
- • Tolen said these collateral issues have made capital less available for renewals, decreased ILS liquidity, and diminished expected returns.
- • Tolen argues that climate change is an ever-present factor in ILS manager selection, and that investors should understand how managers allocate exposure across perils, including Florida wind and peak perils.
- • Tolen positions ILS as an allocation worth pension consideration, citing an uncorrelated return stream and a recommendation for medium-term holding periods.
Summary
According to Joe Tolen, Investment Director in the Credit Investment Group at Cambridge Associates, one of the crucial elements of insurance-linked securities (ILS) manager selection is the ability to identify managers with appropriate capital reserving techniques, which are necessary in the immediate aftermath of large catastrophic events. In a recent report for Cambridge Associates, Tolen wrote that the frequency and severity of catastrophic events between 2017 and 2022 have inevitably led to side pocketing and trapped collateral issues throughout the industry. He said this has made capital less available for renewals, decreased ILS liquidity, and diminished expected returns.
Tolen also highlighted climate change as an ever-present factor in ILS manager selection. He noted that empirical evidence suggests the severity and frequency of some meteorological events, such as extreme rainfall and wildfires, have increased over time, while other primary natural catastrophe perils, including earthquakes and hurricanes, do not appear to have been affected thus far, although climate attribution research is ongoing. Investors should understand whether a manager takes a conservative, longer-term approach to warming global temperatures, and how climate-related adjustments to underwriting are factored in.
On exposure selection, Tolen said understanding a manager's peril exposure and the reasoning behind allocation decisions is crucial. He posed questions investors should ask, including whether a manager is taking on Florida wind for higher premium opportunities, whether diversification reflects a bias away from peak perils, and how its climate stance affects its allocation strategy.
Finally, Tolen suggested ILS offers pensions an often-overlooked asset class at an attractive entry point that can complement existing risk factors with an uncorrelated return stream. He recommended that pensions commit to medium-term holding periods rather than attempt to time the market by capturing dislocations as they occur, and noted that more experienced ILS investors may adjust sizing depending on whether the market is hardening or softening. Tolen concluded that increased volatility and uncertainty in both markets and the natural world have helped position ILS as an allocation worthy of consideration by pensions pursuing long-term goals.
Tolen also highlighted climate change as an ever-present factor in ILS manager selection. He noted that empirical evidence suggests the severity and frequency of some meteorological events, such as extreme rainfall and wildfires, have increased over time, while other primary natural catastrophe perils, including earthquakes and hurricanes, do not appear to have been affected thus far, although climate attribution research is ongoing. Investors should understand whether a manager takes a conservative, longer-term approach to warming global temperatures, and how climate-related adjustments to underwriting are factored in.
On exposure selection, Tolen said understanding a manager's peril exposure and the reasoning behind allocation decisions is crucial. He posed questions investors should ask, including whether a manager is taking on Florida wind for higher premium opportunities, whether diversification reflects a bias away from peak perils, and how its climate stance affects its allocation strategy.
Finally, Tolen suggested ILS offers pensions an often-overlooked asset class at an attractive entry point that can complement existing risk factors with an uncorrelated return stream. He recommended that pensions commit to medium-term holding periods rather than attempt to time the market by capturing dislocations as they occur, and noted that more experienced ILS investors may adjust sizing depending on whether the market is hardening or softening. Tolen concluded that increased volatility and uncertainty in both markets and the natural world have helped position ILS as an allocation worthy of consideration by pensions pursuing long-term goals.
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