Reinsurance Sidecar: Definition & Overview

KEY TAKEAWAYS

• Investment in a quota share agreement with an insurance company is sought after by a reinsurance sidecar.
• According to the quota share treaty, the reinsurer and ceding company split premiums and losses by a predetermined percentage.
• Insurance firms employ these sidecars to underwrite a percentage of their book of business.

What Is a Reinsurance Sidecar?

A reinsurance sidecar is a financial entity. Otherwise known as a reinsurance sidecar vehicle – it solicits private investment in a quota share treaty. This would be with an insurance company. In the quota treaty, the company that is ceding and the reinsurer will share the premiums and losses. This is according to a fixed percentage. Investors that make use of reinsurance sidecars will share in premiums and losses. This is from the underwritten policies. Any profits and losses will be dependent on the amount that was originally invested. 

They are often used by insurers to leverage their relationships with capital market partners.

How Does a Reinsurance Sidecar Work?

Reinsurance sidecar structures are normally set up by insurance companies. This is with the aim of underwriting a portion of their book of business. 

Normally, a sidecar would be set up by existing reinsurers who are either looking to partner with another source of capital, or with an entity. This is to enable them to be able to accept capital from any third-party investors. For example hedge funds or equity firms. This helps them to spread out their risk across multiple avenues. 

Reinsurance is a form of business insurance for insurers. It is also a form of stop-loss insurance for this type of provider. It would work by companies spreading out the risk of underwriting policies. This would happen by assigning them to a number of different business insurance companies – therefore minimizing their risk. 

The company that wrote the original policy is known as the ceding company. The second company that assumes the risk is known as the reinsurer. The company that is the reinsurer would receive a prorated share of the premiums from the ceding company. They will either take on losses above a specified amount or take on a percentage of the claim losses. 

Contracts of this nature have a limited duration. Depending on the financial structure of the contract, they tend to not have a longer period of time than three years.

Summary

Reinsurance sidecars are an appealing way of spreading out market risk. As well as gaining third-party capital from third-party investors. They are an appealing financial entity for investors. Mainly because of the narrow scope of the additional risk portfolio of the book of business, underwritten. 

In practice, this allows investors with very little experience with business insurance underwriting to take part in complex business insurance markets. But alongside a far more experienced partner. This would be facilitated by a placement agent. The placement agent would connect investors with companies. These are companies that are offering securities as reinsurance businesses.