Ride a Sidecar to Easy Capital Growth

In the beginning, sidecars were established primarily by reinsurers to provide high-level property cat retro. Their range of utility has broadened a lot since then, but the structure has not changed much. Investors place capital into a special purpose vehicle (SPV) which takes a quota-share reinsurance of all or part of the sponsor’s book. As with a conventional reinsurance, the cedant is paid for its underwriting services through a ceding commission or underwriting fees.

Provided the book is profitable, everyone’s a winner. The sponsoring carrier can write more and larger risks without increasing their solvency capital, plus they are paid for underwriting and risk-sourcing services (which they have already done for themselves). The investor earns diversifying risk-premium income and can invest their capital elsewhere while the risks underwritten mature. Even the ultimate insured benefits, since they garner a greater (if invisible) diversity of capital to back their policy.

Artemis, a news outlet which tracks such things, has reported the creation of 16 sidecars so far in 2025. The publication has tracked more than 250 formations since Rockridge Re, the first, was launched in 2005 (giving the now-merged-away Montpelier Re $91 million worth of cat retro). No doubt many other sidecar structures have not been initiated but not reported. In total, perhaps $45 billion worth of P&C capacity has been deployed through sidecars since Rockridge broke the ice.

Sidecars both historical and new provide capacity for everything from catastrophe risk to E&S lines. They share, for example, in energy exposures and long-tail casualty, whether live or retrospective. They have been set up by companies including big-name reinsurers, larger primary carriers and run-off companies.

In a relatively new twist on the model, MGAs have begun to use sidecar structures to source underwriting capital. They have tapped conventional insurers and capital-markets investors alike for their capacity. The trend is likely to continue because it moves capital providers much closer to the source of risk and removes frictions from the value chain. A licensed fronting insurer is needed; they may choose to retain a share of the risk ceded to the sidecar, or pass all of it on to third-party investors.

Either way, sidecars are an efficient way for MGAs to garner underwriting capital. Expect such applications to be increasingly influential over the structure of the reinsurance market in the medium term.

For conventional risk carriers, sidecars can provide additional underwriting capital, or surplus relief when solvency tolerance levels are near. On a more strategic level, they can be used like conventional proportional reinsurance to propel growth by allowing more risk to be undertaken. For syndicated underwriting involving multiple carriers covering the same risk, sidecars allow underwriters to deploy larger lines on each risk they underwrite, which makes a market more attractive to placing brokers.

Sidecars are quick to establish, which is enormously advantageous during a hardening market. After a major loss event, setting up a new sidecar backed by agile investors gives a re/insurer the headroom they need to increase their underwriting supply to take advantage of rising rates. This is especially valuable at times when conventional reinsurers and retrocessionaires may be limiting capacity for precisely the perils which are proving most attractive. When markets are softening, sidecar capacity can be deployed to help carriers maintain their top line without adding extra risk to their own balance sheet.

Implementation is efficient and low cost. Onerous capital-raising exercises are avoided, as are the structuring and regulatory complications posed by more complex solutions such as catastrophe bonds and parametric treaties.

Meanwhile a bundle of benefits makes sidecar investment attractive to ILS managers, hedge and pension funds, and family-office investors. They gain direct access to the profits of insurance underwriting, which provides powerful risk and income diversification benefits. The frictional costs of investing in insurance risk through insurance-company equities are eliminated, as is the credit risk associated with insurers’ corporate bonds.

The risk-free rate of return should be accrued at minimum when sidecars are collateralized, but when security is simply pledged, the risk capital deployed can be invested elsewhere. This Buffetesque “float” provides an advantage which has made sidecars supporting long-tail casualty risk, including legacy risk, popular throughout their history and even more popular lately.

Unlike many more esoteric reinsurance products, sidecars feel familiar. Most behave like a quota share reinsurance of a specified portfolio. However, the QS can be more granular, covering just a slice of a certain book. For example, it could provide capacity only for Florida property cat exposures.

A sidecar may be peril-specific, for example covering only earthquake risks. It may be multiline, covering all risks within a class, or provide whole-account reinsurance for a client insurer’s entire portfolio. Under a single contract, the latter grants the investor exposure to the ceding re/insurer’s overall performance. Such a deal will very closely match the cedant’s outcomes.

In a typical example, an insurer with a book of North American property catastrophe risk may already share a proportion of each risk with a Japanese insurer. That partner may in turn cede a proportion of their own local cat risk back to the US carrier, so each company gains geographic diversification.

The US company may wish to support its brokers and clients by offering more capacity for peak perils risk, but not want more risk on its own books, or for its Japanese partner. The reinsurance broker, working with an insurance securities team, could meet this challenge with a sidecar.

A special-purpose vehicle funded by ILS investors seeking non-correlating insurance-risk returns could provide a quota-share reinsurance of the sponsor’s US nat cat portfolio. That would allow the insurer to increase their capacity offer without retaining more risk or ceding more to Japan.

Sidecar capacity may be moderate or enormous. The typical range runs from tens of millions of dollars to hundreds of millions, but several sidecars are greater than a billion dollars, and at the other extreme, a handful have granted only hundreds of thousands of dollars’ worth of additional underwriting capacity. In the life and annuities sector, sidecars routinely reach multi-billion-dollar amounts.

The structure is tax efficient. As with a regular QS treaty, ceded premiums are deducted from taxable income. Fees and ceding commissions, including performance-related profit commissions, are typically subtracted from cessions or treated as additional income, reducing the tax deduction. For US carriers ceding offshore, premiums may be subject to a 1% Foreign Insurance Excise Tax, unless the reinsurer has an exempting “Closing Agreement” with the US tax authorities (and many do). Treatment under IFRS 17 account rules is slightly different, and in any case, it is essential to consult with informed advisors to ensure the maximum tax benefit is achieved.

Sidecars are one of many great reinsurance tools that cedants can use to build their business and ease balance-sheet pressures. They stand out because they’re flexible, efficient, easily established, reliable and fuelled by institutional investors’ growing interest in insurance risk as an asset class. They are popular for property cat exposures, but equally viable for whole-account capacity, casualty books and even specialty risks ranging from offshore to cyber. They can even be used, with a fronting partner in the loop, to provide capital to MGAs.

Expect to see the recent run of new formations continue.