The rise and rise of reinsurance sidecars
EY’s Simon Burtwell and Dan Beard on the growing role of sidecars in the reinsurance market.
While the use of sidecars to mitigate risk exposure has been a feature of the P&C reinsurance market for many years, adoption has been comparatively slow for longer-tailed casualty risks.
But, heading into 2025, a confluence of macroeconomic trends and market forces points to increased adoption by reinsurers, casualty buyers and their asset management partners. Indeed, the rising number of sidecar deals and their unique structures point to a future where such arrangements will feature more prominently on the reinsurance landscape.
Why reinsurance sidecars? Why now?
Today’s unique supply-demand dynamics have made sidecars particularly appealing as an alternative capital strategy. After a few years of strong financial performance and a pricing correction which is becoming more prominent in casualty lines following a strengthening in property rates, the reinsurance market is increasingly attractive to capital providers seeking relatively predictable risk-adjusted returns across longer time horizons.
Some of the recent high-profile sidecar deals were collaborations between reinsurers originating risk at attractive margins and fund managers looking to invest assets in ways that take advantage of current opportunities to generate high yields over time. These structured transactions are also notable for the opportunity to earn broad spreads, based on perceptions that volatility in both asset and liability risks are relatively manageable. We are also seeing some experimentation with sidecars trading in retroactive or run-off liabilities and other areas where they’ve not been deployed previously at scale.
Looking at the big picture, the involvement of sophisticated investors in long-tailed reinsurance is endorsing the current pricing environment, which has tilted favourably toward reinsurers and contributed to the rally in reinsurance valuations. However, if the additional capital in the market were to be meaningful to capacity overall, this could pressure the ability of the market to push for and retain firmer pricing and terms and conditions or even lead to a perception of “cash flow underwriting” rather than robust risk selection.
Making the most of the moment
Both reinsurers and their asset management partners would do well to keep in mind lessons from previous generations of sidecars. First and foremost, all parties must enter into the arrangements with an eye for the long term, given that these arrangements have been difficult to dismantle once in place. Very long commitments on both sides of the balance sheet (with liabilities paying off over 10 or 20 years) are one complicating factor. The inclusion of private asset strategies – which take time to deploy, typically need to be held to maturity and for which there is no secondary market – add to the complexity. These constraints put a premium on flexibility of design, whether for sidecars or similarly structured vehicles, and put a spotlight on sponsors able to offer a route to resolution without liabilities fully running off.
Finding the right capital partners is one way to create a successful partnership. Reinsurers that build enduring relationships with large fund managers or other capital providers will have more flexibility. In some cases, reinsurers will choose to invest more of their own capital to demonstrate alignment as they seek access to more third-party funding for sidecars or other vehicles. The current conditions have created options, so reinsurers must consider the role of sidecars as part of ongoing risk appetite and capital allocation decisions. Executives must also keep in mind how sidecars enhance the core value proposition to corporate clients, primarily through increased capacity and flexibility.
For reinsurers looking to deploy capital to expand their businesses or for cedants struggling to find the capacity they need at fair terms, sidecars may be a viable strategy. Though conditions are quite favourable now, they will certainly evolve over time. That’s why reinsurers must be thoughtful in devising the right approach in the broader context of their retrocession, risk management and alternative capital strategies.
Simon Burtwell is EY EMEIA and UK financial services consulting insurance leader
Dan Beard is EY partner – advisory, risk, insurance