The collateralized insurance and reinsurance sidecar market is expected to remain active through the rest of 2019, as sponsors look for investors and capital to support their capacity needs going into the key January 1st 2020 renewals, according to Aon Securities.
There are a number of reinsurance sidecars being marketed to investors right now, unsurprising for the time of year and given re/insurers increasing appetites for bringing third-party capital more closely within their business models.
As supportive capacity, the sidecar and its typical quota share structure provides re/insurers with a way to leverage the appetite of capital markets investors as a complementary additional balance-sheet.
Sometimes the capital is essentially used as lower-cost retrocession or reinsurance by re/insurers, as they share in their fortunes and their losses with third-party capital providers.
Sometimes, perhaps more appealingly to investors (or not, depending on the circumstances and investor motivations), it’s used to underwrite areas of the risk curve where the sponsor didn’t underwrite before, expand further into peak catastrophe zones, or become active in the market where it’s own balance-sheet could not support the levels of risk involved.
Sidecar activity was relatively buoyant through the end of 2018 and the first-half of 2019 (as detailed in our Reinsurance Sidecar Deal Directory), but actually could have been higher as a number of deals were pulled as they failed to attract sufficient investor demand, we understand.
Discussions have begun early for reinsurance sidecar deals slated for completion in time for the Janaury 2020 renewals, we’re told and while some of the issues over terms and conditions that emerged last year have been resolved, still we hear that efforts to push terms increasingly in favour of sponsors continue in some quarters.
But these issues tend to get resolved, one way or the other and the end of this year could be a busy one for investors in reinsurance sidecars as a result.
Aon Securities noted in its recent report that sidecars are an ILS structure that provides sponsoring re/insurers with “increasing benefits over the medium to long-term.”
The market for collateralized reinsurance sidecars has been active through the last few years, as the vehicles have become a permanent and growing fixture for some sponsors.
As these partnerships with ILS investors expand and become increasingly meaningful to re/insurers, regular renewals and upsizing of sidecars are to be expected, as conditions and loss experience allows.
Following recent catastrophe loss years though, ILS investors and ILS fund managers are putting an increasing focus on achieving targeted returns, which means while there is plenty of capacity available for proportional strategies Aon Securities highlights that increasingly “emphasis will be put on quality cedents with diversified offerings.”
In addition, Aon said that structural changes to sidecars may also be seen, “to help strengthen the participation of the capital markets in sidecar transactions going forward, while maintaining benefit of the product for sponsors,” in the wake of the recent major catastrophe losses.
The risk featured in sidecars has also been changing, especially as ILS investors have shown an increasing desire to move closer to the source of risk, leading to more sidecar vehicles for primary writers and focused on portfolios of primary insurance risk.
Like their reinsurance sidecar cousins, these are often simply a way to bring efficient reinsurance protection into a primary carriers business structure. But in some cases they are also about sharing in the risks, helping primary writers to absorb more of the cat exposure associated with property underwriting and so offer a more substantial alignment of interest (to some).
Given the changes and developments seen in the sidecar market, Aon Securities explained, “Looking forward, we expect the market to remain active as sponsors look for capacity going into January 1 renewals.”
The alignment of sidecar sponsors and investors is likely to become an increasingly important discussion point as the January 2020 reinsurance renewals approach.
Investors are certainly becoming increasingly focused on ensuring their capacity is being used for the right reasons and not simply as a way to arbitrage the reinsurance market, or to access cheap retro capacity.
That’s also likely to result in some differentiation of cedents, on more fronts than just performance, in the sidecar market, as alignment is key for investors who are seeking to partner with those who can outperform the wider marketplace.
For more details of reinsurance sidecar investments view our directory of collateralized reinsurance sidecar transactions.