Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Sidecars in need of significant innovation & change: Mayer Brown’s Spitzer


The collateralised reinsurance sidecar leaves a lot to be desired, speakers at a conference discussed recently, with the structure singled out as being cumbersome and inefficient, leading to an opportunity for anyone wanting to innovate and work to improve them.

richard-spitzer-mayer-brownSpeaking at the SIFMA Insurance and Risk Linked Securities conference in Miami, Richard Spitzer, Insurance Finance partner at global law firm Mayer Brown highlighted the need for sidecars to evolve, to better meet the needs of the ILS market.

“I think sidecars are in need of significant innovation and change,” he began.

“Our current system of forming a sidecar each year, capitalising it, trying to figure out at the end of the year how much money is needed for the prior year, rolling that into a new vehicle.

“Potentially having some investors coming in in the form of preferred shares, others coming in the form of participating notes.

“Even when we’re working on them they just feel overly complicated, cumbersome and inefficient.

“Knowing that you’re going to have to repeat all of this a year later, it’s just very inefficient system,” Spitzer explained.

It’s been this way for some time and regularly both cedents and investors bemoan the sidecar as a structure lacking in flexibility and that could be made friendlier to deal with.

It seems service providers like lawyers are only too aware and Spitzer believes there’s an opportunity for someone to come up with better rules around reinsurance sidecar structures.

He continued, “I feel like where we need innovation is coming up with a structure – and I don’t quite know how you do this as you have different investors from year to year, you have underwriting years and you obliviously need to segregate losses from one to the other – but a structure that allows things to be rolled over more smoothly, so not requiring a lot of the friction you see now.”

The panel discussion at the SIFMA IRLS conference was discussing the way domiciles have innovated in recent years to bring new options to ILS cedents and investors.

Spitzer said that an enterprising domicile could look to the sidecar as a structure that can be improved and therefore secure a position for itself in the market.

“One advantage I see with having new jurisdictions, is you could have another regulator that really wants ILS in its jurisdiction but could really think about how to come up with something different that no one else is doing in the market right now to attract people to do deals.

“I could see that as being a real advantage, sort of leading to innovation or to change,” Spitzer explained.

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