As alternative capital evolves expect corporate reinsurance sidecars

by Artemis on June 24, 2014

As the reinsurance market adapts to and embraces capacity sourced from third-party investors and the capital markets it will innovate, finding new mechanisms and evolving reinsurance and capital market structures to deploy this capacity.

One example of such an innovation is the emergence of corporate sponsored reinsurance sidecars, suggested Bradley Kading, President of the Association of Bermuda Insurers and Reinsurers (ABIR). Kading, speaking at the International Insurance Society seminar in London, said that while the entry of alternative capital into the reinsurance market has changed the industry there is more change to come as the mechanisms available to provide third-party backed reinsurance capacity evolve.

Kading said that he expects the market will innovate to find new ways to put third-party investors capital to work in insurance and reinsurance. With so much capital interested in coming into the insurance and reinsurance market but opportunities squeezed by the highly competitive property catastrophe reinsurance space, investors may have to look elsewhere.

As a result, innovative initiatives such as a corporate sponsored sidecar may emerge, providing a way for large corporations to tap new sources of insurance capital, while providing third-party investors with a structure they are familiar with, given the prevalence of reinsurance sidecars as investor backed quota shares.

A corporate sponsored sidecar will look very like a captive insurer, said Kading, but with third-party investors able to take on a substantial portion of the risk. This could be particularly interesting in sectors such as the energy space, where significant amounts of physical damage risk sit in captives, as well as for large corporates with manufacturing bases in catastrophe prone regions.

This would give third-party reinsurance capital a chance to compete directly with large commercial or facultative insurers as well, as a sidecar structure would allow third-party capital to more readily be put to work in covering complex commercial portfolios from a single cedant or for large risks.

Kading said that he understands that a number of such structures are in the pipeline already and that it is only a matter of time until we see the first corporate sidecars emerge.

It will be an interesting development, as often these captive insurance vehicles are self-insured and used as a way to keep the risk separated from the parent corporations balance sheet. As capital becomes cheaper and more efficient we may see more corporations looking to leverage insurance and reinsurance capital anyway, so the emergence of a corporate sidecar would be a natural evolution of this trend.

The other interesting possibility that a new desire to offload risk among corporates could herald is the return of the corporate catastrophe bond. If corporates are keen to structure their risks into a sidecar type vehicle there is absolutely no reason it could not be issued within a securitization as a cat bond.

If the capital markets and ILS can provide mechanisms to allow corporations to offload risk at prices and terms competitive with the insurance market, we could see an opportunity emerge allowing a further influx of new capital into the market. That would provide additional diversification to existing ILS investors and an opportunity to enter the market to new ones. It would also provide an opportunity for ILS players to begin using more retrocession as well if they increasingly get involved at the primary, corporate protection level.

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