Typically sidecars are set up by existing re/insurers who are looking to either partner with another source of capital or set up an entity to enable them to accept capital from third-party investors.
Reinsurance sidecars are often joint-ventures between two existing insurance or reinsurance businesses. Increasingly though, sidecars are simply a convenient structure allowing third-party capital to be deployed within reinsurance underwriting business.
Reinsurance sidecars are normally fully-collateralized, meaning that the funds are always available to pay claims in the event of losses. The ceding insurer or reinsurer, who cedes risk to the sidecar, will typically pay its premiums for the coverage up-front allowing investors to profit from the premium return but then leaving their collateral exposed for the duration of the underlying reinsurance contracts.
Reinsurance sidecars can either be limited duration, so sometimes simply a year, or more permanent structures which underwrite new business at each renewal season depending on how much available capacity they have or managed to raise from external investors.
Sidecars became very popular in the aftermath of large catastrophe events such as hurricane Katrina, as the structure for a reinsurance sidecar can be established quickly allowing investors and underwriters to profit from changes to the reinsurance rate environment.
Sidecars are perhaps becoming a little less popular now that collateralized reinsurance has grown in use as an alternative to the sidecar structure.
See our list of reinsurance sidecars.
Keep up with the latest reinsurance sidecar news.