Insurance-linked securities (ILS) vehicles and collateralised reinsurance structures owned and operated by primary direct insurance firms are providing another competitive element that affects reinsurers and also blurring the value-chain, according to S&P.
These vehicles are adding another element of competition for reinsurers to deal with, adding to the competition that ILS investors and ILS fund managers have applied, through their allocations to catastrophe bonds, collateralised reinsurance and quota share vehicles.
Rating agency Standard & Poor’s particularly highlights the sidecar vehicle as an example of this.
Collateralised reinsurance sidecars have more typically been a vehicle that a reinsurer would use to secure retrocessional capacity, as well to earn fees from its underwriting by sharing its underwriting fortunes with investors.
However recent sidecar launches such as Liberty Mutual’s $160 million collateralised reinsurance sidecar Limestone Re show that primary insurers are using them as a way to secure access to the capital markets to help to fund a portion of their reinsurance cover.
“As reinsurers are typically the sponsors of such vehicles, they may become victims of their own success as more primary writers might consider creating their own sidecars,” S&P suggests.
We’ve seen a number of sidecar like structures from primary insurers in recent years, as ceding companies become increasingly familiar and comfortable with capital market capacity.
A primary insurer may start with an ILS fund manager participating in its reinsurance program on a collateralised basis, perhaps graduating to a quota share or catastrophe bond transaction backed by investors. Launching its own special purpose insurance vehicle or sidecar is a step further, as the likelihood is that platforms such as Liberty Mutual’s Limestone Re will get used each year and possibly grow.
Structures like this show that the ILS market and third-party investor capital will become an increasingly important and permanent part of primary insurers reinsurance arrangements, increasing competition for reinsurers but offering primary players an efficient way to manage their risk exposures.
With a special purpose insurance vehicle there is no reason a large insurer like Liberty Mutual couldn’t benefit from a sidecar like quota share reinsurance cover, while also issuing participating notes on an excess of loss treaty out of a separate cell.
With flexibility like that now available to sophisticated and ILS ready primary insurers, while the ILS investor community is ready for more risk, we can only see such arrangements becoming increasingly common.