Reinsurance sidecar
A temporary vehicle through which a reinsurer brings in outside capital, on a quota-share basis, on a defined portfolio of risks, without diluting its existing shareholders.
After Katrina, Rita and Wilma in 2005, property reinsurance prices jump and sidecars multiply: reinsurers park outside fund capital in them for as long as the price spike lasts. A sidecar is a special purpose vehicle (SPV) that a sponsoring reinsurer sets up to raise outside capital and expand its underwriting capacity, for as long as it needs, on a specific portfolio of risks. The sidecar's investors (ILS funds, pension funds, family offices) participate in the portfolio's results on a quota-share basis: they receive a fraction of premiums proportional to their capital commitment and bear the same fraction of losses. Collateral is fully funded in a trust account, eliminating counterparty risk. Sidecars are typically created ahead of a hurricane season or as the market hardens, when demand for cover exceeds the capacity of traditional reinsurers. Their limited life, one to three years, gives a flexibility permanent capital cannot. For the reinsurer, the sidecar lets it write more premium without worsening its ratio of premium to equity, and it earns management fees and a profit commission. For the investor, the sidecar provides direct exposure to a reinsurance portfolio curated by an experienced manager. Beazley set up the first cyber sidecar in 2023, a sign that the market is trying to securitize cyber risk.
Following the 2022 hurricane season (Ian), several major reinsurers launched sidecars for the 2023 season, attracted by the hardened market's elevated spreads. Everest Re and RenaissanceRe raised several hundred million dollars through these vehicles, enabling them to write additional business without exposing their permanent capital to a second consecutive season of heavy losses.
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