Sidecar (Reinsurance)

Example

“The reinsurance company established a $200 million sidecar with pension fund investors to write additional catastrophe coverage after Hurricane Maria.”

Memory Tip

Picture a motorcycle sidecar - it's attached to help carry extra passengers (capital) along for the same journey (risk), just like investment sidecars carry extra capital alongside reinsurers.

Why It Matters

Sidecars have revolutionized the reinsurance industry by bringing billions in alternative capital from pension funds, hedge funds, and other investors. This additional capital helps keep reinsurance costs lower and ensures adequate coverage is available after major catastrophes when traditional reinsurer capital might be depleted.

Common Misconception

People often think sidecars are the same as catastrophe bonds, but sidecars typically have broader exposure to an insurer's entire book of business rather than specific perils. Some also assume sidecar investors have no risk, but they actually face the same underwriting losses as the reinsurance company and can lose their entire investment.

In Practice

After Hurricane Harvey causes $500 million in losses, Bermuda Re needs additional capital to maintain its market position. They create a three-year sidecar with $300 million from institutional investors. The sidecar receives 30% of premiums from new business and pays 30% of related losses. If Bermuda Re collects $100 million in new premiums and pays $60 million in claims, the sidecar receives $30 million in premiums, pays $18 million in losses, and nets $12 million profit after expenses, which is distributed to the sidecar investors.

Etymology

The term 'sidecar' comes from the motorcycle attachment analogy - like a sidecar attached to a motorcycle, these vehicles are attached to existing reinsurance companies to provide additional capacity while sharing the ride.

Common Misspellings

Related Terms

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