Look both ways for reinsurance side-cars (May 17, 2006)

Reinsurance “side-cars” special-purpose reinsurers are likely to become increasingly important to the business strategy of insurers and reinsurers, according to a recent Moody’s report.
In its report, Reinsurance Side-Cars: Going Along for the Ride, Moody’s notes reinsurance side-cars are “a recent innovation in the catastrophe-battered insurance and reinsurance industries, whose managements are seeking solutions to stabilize capital and to reduce earnings volatility.”
Moody’s believes side-cars offer a “conceptually simple but versatile alternative, or at least complement, to the traditional reinsurance marketplace — and one that looks directly to the capital markets for insurance risk transfer capacity.”
Ultimately, Moody’s says, the prospects for side-cars will be linked to the cyclical dynamics of the insurance industry.
“In their simplest format,” Alan Murray, a senior credit officer in Moody’s insurance group, says, “these new instruments are established to assume underwriting risk from ceding insurers or reinsurers.”
Murray says reinsurance side-cars typically assume underwriting risk “via a quota-share reinsurance contract. This contract is one in which the side-car assumes a percentage of the ceding company’s underwriting risk (underwriting losses and related expenses) in exchange for a similar percentage of the associated premiums.”
The Moody’s report notes that “for private equity investors, the side-car structure is an attractive alternative to start-up and traditional corporate-reinsurance entities; these investors are keen to capitalize on short-term opportunities offered by disruptions in the insurance and reinsurance marketplaces.”
Moody’s expects that reinsurance side-car structures will likely be aided by improved computer-based tools that should help to evaluate more easily underwriting and credit risks.