15 January 2014

Risk.net: Reinsurance sidecars evolving as competition for third-party capital hots up

A number of reinsurers have launched or renewed sidecars this month, despite softening reinsurance rates, including Validus, Everest Re, Munich Re and Ace, reflecting buoyant investor interest in reinsurance risk. But experts say reinsurers are having to burnish the appeal of their sidecars to tempt third-party capital typically attracted to rival insurance-linked investments.

Investors are also being courted by catastrophe (cat) bond sponsors and ILS funds, which provide access to highly specified risks, putting pressure on traditional sidecar structures.

Sidecars are short-term special purpose vehicles deployed by reinsurers to attract third-party capital into the reinsurance market. Reinsurers can use sidecars to provide additional capacity in order to write more business, expand their risk-return profile, or to offer investors a collateralised insurance-linked investment.

ILS funds are set up by reinsurers and third parties to attract investors seeking diversified returns from a variety of re/insurance instruments, including cat bonds, industry loss warranties and collateralised reinsurance. Unlike the traditional sidecar arrangement, ILS funds are structured for the long term and contain risks ceded from a number of different reinsurers.

In the face of competition, reinsurers are breaking away from the traditional sidecar model, launching vehicles that contain tightly defined portfolios of risk with a longer shelf-life to lure those investors gravitating to ILS funds. This raises the possibility that some sidecars will become a permanent feature of the reinsurance landscape. In their early incarnations, sidecars were deployed opportunistically to take advantage of hardening rates in a post-loss market. Now they have a more strategic function.

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