Sidecars flow in as market cycle slips away
The establishment of starts up via side cars and collateralised reinsurance continues to rise as the market no longer requires a “biblical scale disaster” to attract interest.
That is the opinion of Nick Frankland, chief executive officer of EMEA operations at Guy Carpenter.
Speaking at the broker’s annual renewals discussion, Frankland said that as catastrophes are now only responding to regional losses, the industry may have reached a tipping point, bringing an end to the market cycle.
“Until Katrina, Rita and Wilma (KRW) the number of new starts ups for reinsurance was driven by event stimulus as the capital flooded in after events,” he said. “However, these were traditional reinsurers and designed to be long term ventures.
"In 2006, much more capacity entered the market in response to a far less dramatic event. There were 25 new start ups after this, but 16 were side cars – a new model had begun to emerge. Side cars offered easily applied capital to take short term advantage of the situation. This has continued and now we're getting start ups for no reason at all when we don't need them.”
Frankland also commented on the shift away from Bermuda.
“Prior to KRW, all of these start ups began in Bermuda, but since then, Bermuda is only responsible for 50 percent of these,” he said. “Reinsurance now appears to be a firmly established, profitable and diversified instrument that is not reliant on biblical scale disasters to attract interest.”
Speaking about the ILS market, Frankland said that despite the small amount dedicated to the sector by investors – around one percent – the market remains attractive due to its uncorrelated nature.
“During the financial crisis, all investments of any fund crashed. The only thing that didn't was ILS because its underlying risk was natural peril,” he explained. “Even though investors only give one percent to this industry, they are attracted to these uncorrelated investments.
“A door has been opened that will never be closed again. We are on an inevitable road to somewhere new.”
